Hawaii moves to time-varying ​‘smart’ rates for most utility customers

Last week, Hawaii approved a set of innovative, responsive utility rates to help the state power itself entirely with renewable electricity.

The Aloha State leads the nation in the rate of rooftop solar adoption, and it is shutting down fossil-fueled plants and building large solar and battery facilities in their place. Utility Hawaiian Electric, which supplies all the islands besides Kauai, must ensure there’s enough electricity to keep the lights on after the sun sets on an increasingly solar-dominated grid. The newly approved rate structure will help do that cost-effectively by encouraging people to shift consumption away from the most expensive and dirty hours and into the cheaper, cleaner hours for the grid.

Hawaiian Electric customers will soon see their bills made up of three components. A small fixed charge covers utility billing and payment-collection expenses, which everyone incurs. In addition, there’s a ​“grid-access charge” that’s proportional to the capacity a customer pulls from the grid in a given month — so for example, a small apartment will pay less than a mansion with three Teslas and a jacuzzi.

But the bulk of the monthly payment will be determined by a time-of-use rate that splits the day into three sections: electricity in the evening peak hours costs three times more than it does in the sunny hours of booming solar production. The middle of the night is cheaper than the peak but more expensive than the sunny hours.

People can maximize savings with water heaters that can be programmed to dodge pricey hours or electric vehicles that can automatically charge outside peak times. But even without fancy ​“smart” appliances, households can save money through simple measures like forgoing doing laundry between 5 p.m. and 9 p.m.

Hawaii’s new rate structure has particularly significant implications for households with rooftop solar. Like other states, Hawaii has struggled with the question of how to fairly charge rooftop solar households; solar-friendly rates may let those customers avoid costs they do impose on the grid, effectively shifting costs onto other people. But when utilities attempt to collect more money to compensate, they tend to suggest fees on solar installations that are blunt if not punitive.

Hawaii’s new rate design, approved on October 31, replaces various general and solar-specific rates with one transparent design that applies to all electricity users: Customers simply pay for the costs they impose on the system. This means the utility raises the revenue it needs to fund its operations, but individual customers can influence how much they pay based on their own actions.

“Everybody is paying their cost to connect to the grid — there are no hitchhikers here,” said Jim Lazar, the veteran rate-design expert who helped craft Hawaii’s policy. ​“People who want to save money can do so. People who just want to use electricity and don’t want to try and save money pay the costs they incurred and nobody else is subsidizing them.”

First-in-the-nation statewide adoption of a smart rate

The notion of designing rates to encourage behavior that benefits everyone should be a no-brainer, but no other state has approved policies like what Hawaii just adopted, Lazar said.

Specific utilities have: Fort Collins, Colorado instituted mandatory time-of-use (TOU) rates in 2018 and saw ​“significant reductions in peak loads” and better matching of demand to the production schedules of renewables, Lazar said.

The municipal utility in Burbank, California launched a similar program but only for electric vehicle customers. A more substantial proof of concept is on display in Sacramento, where the municipal utility sells more power than the entire state of Hawaii consumes. SMUD tested a TOU rate a decade ago, crunched the data extensively on how real people responded to the signals and eventually moved all customers to that system.

SMUD’s lead analyst on that long-ago pilot, Jennifer Potter, gained unparalleled experience with the real-world implications of smart utility rate design. She later moved to Hawaii to research pathways to 100 percent renewable energy at the Hawaii Natural Energy Institute. Gov. David Ige appointed her to the state’s Public Utilities Commission in 2018, where she eventually presided over the rate-design proceeding. (She stepped down from the commission at the end of October, after approving this measure and a distributed energy program.)

“What SMUD had done was not unfamiliar to the commissioner who signed the order — she made it happen at SMUD,” Lazar said.

Not all time-varying rates work equally well, however. If peak consumption costs only slightly more than off-peak, most people won’t change their behavior to avoid it. Based on decades of studying real-world pricing experiments, rate expert Ahmad Faruqui and his colleagues at The Brattle Group identified an empirical relationship between the strength of a peak price signal and the demand reductions it induces. They dubbed this ​“the Arc of Price Response.”

“We find that if the TOU rates don’t provide a significant savings opportunity to customers, they won’t reduce peak demand by very much, if at all,” Faruqui explained in an email to Canary Media. ​“If the savings opportunity is strong, customers will reduce peak demand and save money.”

The Hawaii design follows recommendations Faruqui made earlier in the state’s proceeding. It has a ​“strong price signal,” with a peak rate three times higher than the off-peak rate. That means it’s likely to elicit positive changes in consumer behavior.

Plenty of other states stand to benefit from modernizing rates to shift consumption away from the most expensive hours. The need is especially urgent in California, which is still deliberating over how to revise rates for its rooftop solar customers.

After California spent years encouraging rooftop solar adoption and even mandated it for new home construction, regulators endorsed a punitive fee for households putting solar on their roofs based on the argument that these customers were not paying their fair share of fixed costs. Widespread backlash forced California’s regulators back to the drawing board earlier this year, meaning they still could learn something from Hawaii’s work.

“California should use this order as the model for their decision on the future of net metering,” Lazar said. ​“You don’t have to discriminate against solar customers; you can apply this rate to everybody.”

California’s proposed ​“dumb rates” slap fees on customers regardless of whether they behave in ways that help or hurt the broader electricity system. A household could buy a battery, store solar production through the afternoon and discharge it when the grid desperately needs clean peak power in the evening, but that household would still have to pay the same generic solar fee as a mansion that dumps unwanted solar on the grid at noon and uses immense amounts of power in the evenings.

By contrast, with Hawaii’s smart rates, a house that produces all the power it needs in the daylight but draws a ton of grid power in the middle of the night will pay its fair share for access to the grid. And the rate design itself rewards customers for reducing peak demand, as opposed to California’s recent habit of narrowly averting grid emergencies by begging customers to donate grid flexibility for free.

Will smart utility rates be put in place elsewhere?

The direct impact of Hawaii’s new rates will be relatively contained, in that only 1.4 million people live there. But Hawaii’s vanguard status in the energy transition means that ideas that make a splash there often ripple across the Pacific and eventually flow through the mainland.

Hawaii passed the first state-level clean electricity mandate in 2015; about a dozen other states followed suit. It eliminated coal and is in the process of filling the gap with solar and large and small batteries; that lesson could resonate on the mainland, where previous coal retirements almost always led to fossil gas buildout. Now the elegant design of consumer pricing to encourage a clean, efficient grid could be the next trend to take off.

“This win is huge in that it sets a precedent for other states, which are much bigger states,” Lazar said. ​“It’s critical for Hawaii to do this now. It’s not critical for Kansas to do this now, but it will be important for Kansas to do this in the next 10 years.”

In other words, Hawaii’s solar generation is so pronounced, and so much cheaper than the imported oil power it relies on in the evenings, that the policy resonates on economic grounds as well as environmental. Kansas may not face as urgent a peak supply challenge today, but wind and solar are surging across the U.S., and their ascendance will force similar dynamics in far-flung places in the years to come.

Hawaii’s success in revamping utility rates was due to a combination of clear grid needs, the economic value of peak reduction, political buy-in to decarbonize the grid, widespread disgruntlement about the cost of incumbent fossil power plants, and fortuitous personnel in the crucial roles of utility regulators.

“In Jennie [Potter] and Jay [Griffin], they had two of the most qualified commissioners in the United States to work on a smart transition — both of them had worked professionally in the field,” Lazar said.

In theory, it shouldn’t be hard to sell other states on designing an economic system that rewards pro-social behavior. But maintaining opaque, non-price-signaling rates often works just fine for utilities. Under U.S. regulatory principles, utilities earn a profit for building out generation and wires to meet the peak; reducing peaks through simple price signals cuts into those profits.

Other reasons why ​“smart rates” have yet to reach broad adoption leave the realm of economics and veer into ​“behavioral psychology,” Lazar said. ​“People generally prefer tyranny over disorder; people generally prefer simplicity.”

The notion that any difference in rates at different times might confuse people leads many consumer advocates to oppose such a change. It’s true that a poorly designed or poorly communicated shift could raise rates for certain customers.

Texas sent a stark warning of this when a startup called Griddy, which offered real-time pricing to retail customers, exposed people to devastating bills in the 2021 cold snap before going out of business. Real-time pricing works great for large industrial entities that can hire full-time energy experts to save them money by shifting electrical processes out of high-priced hours, Lazar said. But that’s just too hands-on for most normal people until we see the widespread adoption of smart appliances that can crunch the numbers on their behalf.

“The Hawaii approach is about the right mix of simplicity and sophistication,” Lazar said. ​“People can understand it and respond to it. They can save money, and I don’t think they’ll be unreasonably inconvenienced.”