Incentives and Rate Design for
Efficiency and Demand Response

In October 2005, the Demand Response Research Center awarded contracts to Christensen Associates Energy Consulting, and Energy and Environmental Economics, Inc. (E3) for Phase 1 of a two-phase research effort titled “Incentives and Rate Design for Efficiency and Demand Response.” Both firms will perform the same set of tasks and essentially compete to see which firm moves on to the Phase 2 methodology development effort.

Historically, utilities have not integrated DR incentives into the basic customer rate, preferring instead to pay for DR participation rather than link incentives to customer performance. Incorporating DR incentives into the underlying rate would require revised rate designs, regulatory proceedings and public hearings. Performance-based rates also would necessitate advanced metering and communication systems to capture the appropriate billing metrics and changes in customer usage. Because participation incentives are less expensive to administer than advanced meters, they prevailed and have since become the default industry standard for small customers.

While separate participation incentives and add-on rate adjustments may have had a logical basis when DR was first introduced, the lack of integration with the customer’s basic retail rate is now a major cause for concern. Incentives that pay for participation rather than performance create equity problems, build in recurring utility incentive expense unrelated to DR operations, and often complicate customer education.

The “Incentives and Rate Design for Efficiency and Demand Response” research effort will seek development of a framework and prototypical rate designs for translating the value of demand response into clear, understandable incentives or price signals that link energy markets and utilities with their customers. Presenting customers with rates and incentives that integrate efficiency and demand response is expected to simplify customer operating and energy investment practices and substantially increase long-term load and energy impacts.

A more comprehensive discussion of the issues and objectives for this project can be found in an issue paper included in the Research Opportunity Notice used as the basis for the competitive proposal process. A copy of this issue paper, titled “Incentives and Rate Design for Efficiency and Demand Response,” can be found on the DRRC web site.

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