In recent years, Massachusetts has outlined – and consistently reinforced – one of the clearest and most unambiguous visions for the future of clean buildings and clean heat: electrification. This includes the Department of Public Utilities’ (DPU’s) landmark order establishing regulatory principles and framework to wind down investments in the Commonwealth’s natural gas pipeline distribution system.
United's latest report with Demand Side Analytics identifies ways in which the Commonwealth could support electrification without abandoning its energy conservation and long-term system cost containment imperatives. What we discovered: A time-of-use (TOU) electric rate, paired with enhanced energy efficiency efforts, can significantly reduce residential energy bills for electrified homes while mitigating rate increases for all homes.
In the fall of 2023, representatives from the Executive Office of Energy and Environmental Affairs (EEA), the Department of Energy Resources (DOER), the Massachusetts Clean Energy Center (MassCEC), and the Attorney General’s Office (AGO) kicked off the Interagency Rates Working Group (IRWG) to advance near- and long-term electric rate designs that align with the Commonwealth’s decarbonization goals. United participated in numerous stakeholder engagements, which ultimately led to a Near-Term Rate Strategy Report and a Long-Term Ratemaking Study produced by the IRWG. In addition to those findings, both National Grid and Unitil have had heat-pump specific rates approved and Eversource will file their proposal in the coming days. Additionally, DOER filed a petition for a seasonal heat-pump rate and the Commission has initiated an investigation based on DOER’s request. Finally, the agencies leading the IRWG have kicked off a new Rates Task Force to develop long-term rate design recommendations.
Our study uses energy consumption data from five representative Massachusetts households – one with gas heat, and four with varying degrees of electrification and efficiency. Its findings can be broken down into four categories, each of which is explored below.
The Impacts of TOU Rates on Customer Bills
Our modeled TOU rate, which has higher volumetric prices during peak periods and lower volumetric rates during off-peak periods (a ratio of 3-to-1), can save electrifying households about $570 on their electric bills. TOU rates can act as a demand management strategy by incentivizing reductions in electricity consumption during grid stress periods, which occur when system demand is high. While other rates shown in this study aim to propel home electrification with reduced volumetric rates, TOU rates are commonly used to reduce demand during peak periods, when it matters the most, by improving system utilization.
The Impacts of Efficiency
The importance of heat pump efficiency levels and building shell insulation on annual bills is hard to overstate. Once we looked at the numbers, it was clear: only homes using the lowest-efficiency heat pumps saw their energy bills go up, no matter the rate plan. Upgrade levels that used a high-efficiency heat pump (Upgrade Levels 8 and 10 in the Figure below) were able to at least match or beat pre-electrification combined energy bills, on both current rates and our modeled TOU rate. Even more, the value of adding an enhanced building enclosure package is an extra savings of $765 annually over and above the high-efficiency heat pump alone. By design, TOU rates build on those savings.
Changing Gas Rates
Of course, electrification-related electric bill increases do not exist in a vacuum, and this study attempts to understand them in relation to changes in gas delivery costs. A simple analysis holding National Grid’s current residential revenues constant illustrates the escalating way in which gas bills are likely to rise. Our analysis shows how important it is for policymakers to proactively manage this transition, rather than letting outdated rate structures penalize customers who haven’t electrified yet.
Alternative Rate Designs and System Costs
As part of our study, we also considered other rate design options, similar to those considered by the IRWG. We found that these other rates which focused on decreasing volumetric charges (high fixed charges, decreasing tiers, seasonal), but did not have a time-based component, drove up system costs at a greater rate than the TOU rate. This leads to larger future rate impacts on all customers. For instance, when the system becomes winter-peaking in 2035, if 30% of the customer base electrifies with minimum efficiency, approximately $70 million in increased system costs can be avoided with TOU.
Our analysis also found that the high-efficiency heat pumps and added insulation bring down the costs to the system of installing additional heat pumps – from approximately $1,000 per electrified household to under $300 per household in a summer peaking system, and in a winter peaking scenario the savings are even higher.
Rate design is one of the most complex issues in utility regulation and can be contentious. In addition to affecting people directly at their pocketbooks, it is so difficult because it entails balancing many important priorities and values, such as fairness between customers in different circumstances, system efficiency and energy conservation, simplicity, effectiveness at collecting appropriate revenues, achievement of state policy goals, accommodation of new technologies, social equity, and more. Though there is no “one size fits all” solution, one thing is clear: yesterday’s electric rates won’t support the clean energy economy of tomorrow. We urge Massachusetts leaders to keep their eye on the prize: a more affordable electric system for all electrification and clean energy technologies today and in the future.