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What Do Small Businesses Want from Alternative Electric Rates?

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While time-of-use (TOU) deployments and time-varying pricing pilots aimed at residential customers have garnered significant industry attention, the potential for moving small-and-medium business (SMB) customers to alternative electric rates should not be overlooked by electricity providers and the industry at large.

For one, SMBs today already have more experience with alternative electric rates. According to an analysis of U.S. Energy Information Administration (EIA) data, about 10 percent of SMBs are on alternative rates compared to about 5 percent of residential electricity customers. In many service territories, SMBs consume over 20 percent of the electricity generated and engaging them in alternative rates can be a significant boon in reducing peak demand.

To assess what SMB customers think about alternative rates and what types of programs, messaging and incentives will encourage them to engage, the Smart Energy Consumer Collaborative (SECC) conducted the “Rate Design: What Do Consumers Want and Need?” study, which reached a nationally representative sample of 517 SMBs via online consumer survey panels in July 2019. Survey respondents represented non-utility businesses with 500 or fewer employees and were at least partially responsible for reviewing or paying their organization's electric bill.

Based on the report’s top findings, here are three key takeaways about what SMB customers think about alternative rate designs and what’s most important to them when it comes to electric rates:

1) SMBs exhibit relatively high rate literacy and strongly prefer alternative rates over traditional flat rates.

Generally, the SMB respondents reported a high level of awareness of how electricity usage is measured and with most of the rate plan options showed to them in the survey. Nearly 90 percent of all SMBs reported knowing that electricity usage is measured by kilowatt-hours, and they also reported high awareness of time-of-use rates, critical peak pricing, real-time pricing and other rates and related programs.

In conjunction with this relatively high awareness, the survey demonstrated that SMBs have a strong preference for alternative rate options using a conjoint analysis exercise, which uncovered SMBs’ revealed preferences rather than their stated preferences. In this part of the survey, respondents were prompted to select their favorite of four rate plans (with varying pricing models, demand charges, renewable energy sources, sign-on benefits, etc.) on a series of screens. Each time, they have new options to select, and through this process, repeated across all the respondents, what’s really important to SMBs came into focus.

The conjoint analysis revealed that nearly three-quarters of SMBs would prefer some sort of time-varying alternative rate (real-time pricing, variable peak pricing or time-of-use) over a standard rate (where kWh prices are consistent regardless of time of day), as SMBs chose an alternative rate in 73 percent of discrete choice scenarios presented to them. Furthermore, if offered their optimal rate plan configuration (a two-tiered TOU with bill protection guarantee, no extra fees and a wind power source), 79 percent of SMBs would prefer an alternative rate plan over a standard rate plan.

2) Automation technology significantly increases the willingness of SMBs to adopt an alternative electric rate.

The survey also asked SMBs whether the addition of automation technology – such as a smart thermostat or a home energy management system – would impact their willingness to participate in time-based pricing programs, and over half (59 percent) of SMBs indicated that they would be more willing to participate in a time-based pricing program if automation technologies were deployed at their businesses.

Respondents in the Established & Engaged segment were most likely to report being willing to participate in time-based pricing programs compared to all other segments, with 80 percent reporting a willingness to participate and another 15 percent stating that they might participate. Only the Decidedly Disengaged segment lacks serious interest in using automation technology with a time-based pricing plan. (To learn more about SECC’s four SMB customer segments, read the “Understanding Your SMB Customers: A Segmentation Approach” report here.)

To drive adoption of alternative rate plans, electricity providers can use incentives to promote the installation of automation technologies and can require incentive recipients to sign up for a time-varying rate plan as a condition of participation.

3) Additional fees and charges – including demand charges and green power premiums – stifle SMB interest, while bill protection is seen as a major benefit.

As with the residential sample from the report, SMBs were significantly less interested in alternative rate plans once demand charges and green power premiums were included in the rate, and interest progressively decreased as these charges are increased.

In fact, in the conjoint analysis, these two elements were more impactful to SMB interest in a specific rate configuration than any other element. SMBs were relatively equally interested in a two-tiered TOU plan, a multi-tiered TOU plan, real-time pricing and variable peak pricing if the demand charges and green power premiums were similar. This demonstrates that add-on fees – rather than type of alternative rate – is where interest erodes. Electricity providers should keep demand charges and other fees to a minimum if they want to maximize enrollment and retention.

At the same time, a one-year bill protection/price guarantee was seen a major benefit by the SMB respondents when compared with other sign-on benefits, such as a one-time bill credit and a rate comparison. As many organizations already have high energy expenses, bill protection is a proven method to avoid any surprise spikes in electricity bills within the first year of a new rate.

SMBs are ready to adopt alternative rates today

As electricity providers continue to look for ways to address peak demand, engaging SMB customers in alternative electric rates and related programs, such as critical peak pricing and peak time rebates, could be a very valuable resource. SMBs are mostly familiar with alternative electric rates – especially time-of-use – and demonstrate a considerable appetite in adopting them. Furthermore, the SMBs that are already on alternative rates seem to view their experiences favorable. By focusing on what these customers want and do not want from alternative rates, providers can develop mutually beneficial partnerships with their SMBs customers to lower costs and increase system reliability.

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Matt Chester's picture
Matt Chester on Dec 2, 2019 11:04 pm GMT

As electricity providers continue to look for ways to address peak demand, engaging SMB customers in alternative electric rates and related programs, such as critical peak pricing and peak time rebates, could be a very valuable resource.

small businesses are typically not large enough accounts to require a dedicated representative as with large industrical/commercial customers-- but are there ways in which emerging tech can be used to give SMB customers more of that personalized experience that could pay dividends?

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