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Utility Rate Structure


The structure of utility rates significantly impacts how quickly solar customers will recoup their investment. Similar to most other industries, public utilities generally make more profit as they sell more product, in this case electricity. However, building more electricity generation and transmission infrastructure often conflicts with conserving energy and the use of solar and other on-site generation technologies. Under this structure, a utility has no incentive to allow or encourage their customers to generate their own energy on-site.  

However, it is possible to design utility revenue policies and rate structures so that utilities and their shareholders are rewarded for working with their customers to encourage conservation and distributed generation of electricity, while at the same time sending price signals that more closely reflect the real-time supply and demand of energy on the grid. The goal is to provide more options for utilities and consumers - no one solution is perfect for every situation. Smart policy and informed public utility regulators can structure utility rates to provide win-win approaches for utilities, their shareholders, and customers. 


Under current regulation, most utilities’ revenue generation is tied directly to retail sales, and therefore any reduction in energy consumption directly reduces the companies’ profitability. This creates a perverse direct financial disincentive for utilities to support energy efficiency and clean and renewable distributed generation, such as solar energy. 

The purpose of a decoupling mechanism is to remove this disincentive, by eliminating the link between electricity sales and profits. Under decoupling, instead of linking utility profits to the amount of power sold, profits are linked to the number of customers served. A simple system of periodic "true-ups" in base electricity rates would either restore to the utility or give back to customers the dollars that were under- or overcollected as a result of fluctuations in electric consumption and retail sales. This will correct for disparities between the utility’s actual fixed cost recoveries and the revenue requirements approved by utility regulators. However, a decoupling mechanism alone only removes the disincentive to support energy efficiency and solar energy. To be most effective in promoting energy efficiency and solar energy policies, decoupling should be linked with specific targets and create rewards for utilities for achieving environmental targets beyond their mandates. 

A well designed decoupling mechanism does not shift risks from utilities to consumers, but instead shifts the variables that determine utilities’ financial health. Instead of increasing profits by increasing sales, utilities should be able to increase profits by improving performance, reliability and service. 

SEIA supports states adopting a decoupling mechanism that: 

  • Eliminates the link between utility profits and utility sales 

  • Rewards utilities for improving performance and reliability 

  • Encourages maximum energy efficiency and solar energy penetration 

  • Is developed in conjunction with a system that sets specific energy efficiency and clean distributed generation targets, and rewards utilities for achieving those targets. 

Time-of-Use Rates 

Under most conditions, utilities face very different costs for generating electricity at different times. However, in most places utility customers pay the same price for electricity regardless of when it's purchased. These markets are divorced from the basic principles of supply and demand. As a result, homeowners and businesses have no particular incentive to minimize their use of grid-supplied electricity during peak demand hours. If consumers received price signals that more accurately reflected the supply and demand of electricity, they might choose to conserve energy or generate their own. As the demand for peak energy grows, utilities are forced to build costly generation assets that sit idle during non-peak demand hours. These generation assets impose unnecessary costs on ratepayers.  

Commercial Demand Charges  

Demand charges are based on maximum electrical demand over time. If electricity were water, demand charges would be based on the size of the pipe, not on how much water flows through it. High demand charges, particularly those calculated over periods of months or years, significantly undermine the economics of commercial solar systems. Some utilities have adopted optional rate schedules that eliminate these charges in lieu of very high peak demand charges. This structural change to rates provides a strong incentive to solar system owners to maximize production during peak hours when it is most valuable to the utility and its ratepayers.