Incentives and Rate Designs for Efficiency and Demand Response

This report develops a conceptual framework for designing retail electricity rate structures that provide appropriate incentives for energy efficiency and demand response. The conceptual framework is based upon well-established economic theory of public utility pricing going back at least twenty years, and upon power industry experience of a similar length of history. The emphasis within this document is on the proper application of pricing principles in designing a portfolio of products that will produce the efficient amount of demand response. The report also describes prototype rate designs that illustrate the types of retail rates that provide these incentives. Finally, the report includes a proposed plan for a follow-on Phase II effort that will demonstrate the use of the framework as a tool for long-term research concerning electricity pricing, and will develop, through a utility case study, specific recommended rate structures for use by the California utilities.