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Devyn Barron
Devyn Barron
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Designing Equitable Energy Rates: Considering ALL Customer Segments

This post is written by and posted on behalf of Mary Palmer, Director, Energy Equity and Inclusion, Rhaman Johnson , Project Manager, Standards and Interoperability, and Drake Moran, Senior Analyst, Research & Industry Strategy.

Rate design plays a crucial role in influencing energy equity. It determines who bears the cost of the clean energy transition and how customer behaviors are shaped. It can also be leveraged as a powerful tool to address affordability and energy burden.

Many electric power industry leaders and community advocates aspire to implement energy equity programs and strategies that integrate into existing frameworks and resonate with community values. That's why this summer SEPA facilitated a focus group series to discuss critical topics including Rate Design.

How does rate design impact Affordability and Energy Burden?

People across the country have expressed concern over rising costs and affordability. According to Low-Income Energy Affordability Data, if an energy bill is 6% or more of a customer’s monthly income, they are considered to be energy-burdened. However, for customers who fall below that percentage, but are still impacted by rising energy costs, rate design may not alleviate that burden.  Focus group participants noted that rate design could be used both as a tool to address affordability and alleviate energy burdens on low-income groups. 

What are the billing strategies used to manage financial stress and prevent disconnections:

  • Proactive Approaches. Billing strategies including discounted utility rates, lifeline/tiered discount models, and “smoothed billing” can prevent customers facing financial stress from falling behind on their electric utility payments. 
  • Remediation Approaches. Arrearaged management plans and bill assistance programs like LIHEAP are commonly used to manage past-due balances as a last measure to prevent disconnections. Many of these programs are only available for low-income customers. Focus group participants noted that there is a need to explore opportunities to expand eligibility to moderate-income customers who experience similar financial pressures.
  • Post-Disconnection Approaches. Debt relief programs help customers reduce the amount owed to their utilities, expediting reconnection. Regulations often dictate the eligibility criteria and guidelines for debt relief programs including the annual maximum amount that can be forgiven. Many utilities have disconnection policies that include weather-, age-, and medical-based protections. Debt relief programs ought to be the last line of defense as striking a balance between financial solvency. Additionally, customer protection can introduce added complexities. 

Opportunities for Stakeholder Engagement

There is a significant opportunity to increase stakeholder engagement in rate design to ensure that the rates set by utilities and regulators reflect the diverse needs and circumstances of all community members. Engaging a broader array of stakeholders, especially those from underserved communities, can help create rate structures that are more considerate of different energy usage patterns and economic situations.

What are some improvements that can be made to the engagement process?

  • Increasing transparency about the decision-making process and rate inputs
  • Allowing community members to request an independent analysis
  • Increasing the public input time frame (average is around two weeks)
  • Facilitating community education about energy-related topics
  • Establishing standing community advisory committees and working groups
  • Increasing and ensuring accessibility of engagement meetings (e.g. using plain language in documentation, being intentional about meeting locations and times, offering childcare, etc.)
  • Facilitating participation compensation
  • Adding on-bill promotion of public input opportunities
  • Find new and creative ways to engage customers on digital platforms. (Not long ago paper bills sent to customers in the mail could show opportunities for ratepayers to get involved in their utilities’ programs. The dominance of online payments and social media has created a less invasive way to reach out to customers. Advertisement of public meetings and online engagement can be as recent and frequent as a text message or social media post. Can your utility make its programs as ubiquitous as an algorithmic ad?)

Incentivizing Desired Behaviors and Outcomes

Rate design can be used to support load management, carbon reduction, and affordability goals. Some examples include:

  • Integrating Externalities into Rate Design. Some commissions factor public health impacts and the societal cost of carbon into rate design, positioning utilities to develop integrated resource plans with distributional equity, the long-term impacts of carbon emissions, and other socio-economic considerations in mind.
  • Dynamic Rates. Rates such as Time-of-Use (TOU) offer lower prices during off-peak hours. This can encourage consumers to shift their energy use, potentially leading to lower overall energy costs and less strain on the grid during peak times.
  • Energy Efficiency and Electric Vehicle Charging Rates. Incentivizing customers to adopt clean energy technologies and solutions, can increase energy efficiency and allow them to play an active role in the clean energy transition.

These solutions are not a panacea. Our focus groups noted that each state and regulatory body has different legal constraints and capabilities, especially related to integrating externalities into rate design, which can affect the implementation of rate design initiatives. Many smart technologies, energy efficiency measures, and EV infrastructure needed for dynamic rate responsiveness require upfront investments that may not be accessible to everyone. Finally, there are underlying assumptions about what constitutes “normal” household consumption behavior that will need to be verified. For example, communities with a large proportion of members that live in multigenerational households or work in the service industry will have different load profiles than what is considered to be “typical”.

Conclusion

Leaders in this space have demonstrated the value of making an investment to establish and regularly re-evaluate a thorough, baseline understanding of customer needs and behaviors. Rate design is not stagnant, it must evolve to reflect changing technologies, consumer behaviors, and policy goals. This includes reconsidering traditional rate structures, like rate classes and cross-subsidization policies, to align with current objectives. 

To further our work advancing energy equity, SEPA is excited to announce an upcoming series of Energy Equity Insight Briefs. In 2025, these briefs will cover a range of energy equity topics and are designed to provide actionable insights to electric utilities, policymakers, technology providers, and communities. Stay tuned for these publications, and if you’re interested in contributing, learning more, or working with SEPA on these issues, we encourage you to contact SEPA’s Director of Energy, Equity, and Inclusion, Mary Palmer, at [email protected].

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