EVs Everywhere—What Do Electric Rate Designs Have to Do with It?

Peter Cappers

Is anyone else suffering from “The Baader-Meinhof Phenomenon” where now that I’m seeing lots of commercials about electric vehicles (EVs), it feels like they are everywhere? It’s the same phenomenon that applied on those road trips as a kid where you looked for blue cars and they suddenly appeared. While walking my dog, Wallie, the other day, I heard that eerily familiar and futuristic whine of an electric motor seemingly twice as often as the low rumble of an internal combustion engine. Yet, nationally, as of early 2024 not quite 1 in 10 of the roughly 286 million cars on the road were electric. I could have sworn it was 1 in 2.

Perhaps Wallie and I were experiencing a glimpse into the future when 33 million EVs are expected to be on the road by 2030. Importantly, the increasing number of EVs will have profound impacts on the levels of instantaneous demand and energy they impose on the electric grid. This, in turn, will have implications for an electric utility’s cost and revenue. My colleague, Andy Satchwell, and I explored how utilities were responding to or preparing for these impacts from a rate design standpoint. Utility rate design is a combination of art and science… or maybe better put as the reverse—science and then art. At their core, regulated utility rates are designed to collect sufficient revenue to cover a utility’s prudently incurred costs. But there are a number of design decisions about how different charges are designed, what rate levels are selected, whether alternatives to traditional metering are employed, etc. This is where the art comes in. Just as two artists can see the same bucolic setting and paint them in wildly different styles, utility rate managers can see the same revenue to be collected and design wildly different rates. We wanted to better understand what may motivate utilities to design rates differently and how utilities were putting those motivations into practice.

Looking More Closely at How Different Objectives Lead to Different Rate Designs

As scientists, we wanted to apply some rigor and not just create an after-the-fact narrative that fit into the data we collected and analyzed. So before doing anything, we first identified five policy-driven objectives that could be used as the basis for EV retail rate design:

1. Promotion of EV adoption: The objective is to encourage and promote drivers to adopt EVs. Design elements produce simple and understandable rates that enable direct comparisons to customer monthly gasoline costs and/or result in predictable monthly EV electricity costs that yield savings relative to gasoline.
2. Grid management: The objective is to incentivize or control EV charging in response to utility grid needs at the bulk and/or distribution levels (e.g., reduce bulk power system peak demand, support local distribution network voltage). Design elements include temporal and/or locational differentiation in rates, or demand charges that communicate utility system conditions/needs, either of which may be paired with control technologies allowing the utility to directly interrupt or reschedule EV charging.
3. System economic efficiency: The objective is to optimally charge and/or deploy EVs in a manner that minimizes long-run marginal costs. Design elements include temporal differentiation in rates that communicate marginal system costs.
4. Decarbonization: The objective is to charge EVs in such a way as to reduce direct and indirect carbon emissions. Design elements include temporal rates that communicate a carbon signal typically based on marginal or average power system emissions.
5. Equity: The objective is to equitably share the benefits of EVs across all customers. Design elements are temporal or locational rates that do not unduly discriminate and/or more fairly apportion EV benefits to a group of customers.

We next constructed a database of piloted, proposed, and offered rates among U.S. investor-owned utilities (IOUs) between 2012 and 2022. The database was composed of 217 electric utility retail rates from IOUs in 37 states and the District of Columbia that either required proof of EV ownership or were otherwise designed for the purposes of reselling energy for use in EV charging (i.e., EV-specific rates). Although the database didn’t contain the full population of EV-specific rate filings, we believed it captured nearly all publicly available regulatory filings of EV-specific rate offerings and was therefore sufficiently representative of the IOU experience.

Overall, our research found that EV-specific rate designs offered during that period by IOUs generally included peak and off-peak period prices, oftentimes with some form of seasonal differentiation in the period definitions or price levels, and submetering of EV-charging load typically via a second utility account meter. A little less than half of the EV-specific rates offered to commercial customers included some form of a demand charge and were almost never included in rate offerings to residential customers. Regardless of customer type, EV rates basically never included locational differentiation and neither required nor integrated direct charging control technologies.

The prevalence of such relatively simple rate designs implied a strong interest in promoting EV adoption while seeking to modestly manage the impacts from widespread charging at times when the grid was either generally expensive to operate, approached the limits of safe operation, or both. The absence of more complex and highly dynamic rate designs suggested that, as in so many other utility applications, achieving the greatest level of economic efficiency was likely not as high a priority as other issues or may not have been feasible or cost-effective due a variety of reasons (e.g., the existing metering infrastructure is too limited or nonexistent).

Rate Design as Just One of Several Tools in the Regulator’s Toolkit

So, although these rate design choices clearly affect the overall economics of owning and operating an EV, there are other market forces at play that may have greater impact on how many of these cars that Wallie and I see on our walks. Battery range, prevalence of charging stations, speed of charging, and aesthetics, as well as purchase price, all play a role in consumer decisions. Therefore, rate design is one of many important considerations for utilities in achieving their EV objectives, and should be viewed as one of several tools in the regulator’s toolkit.

Peter Cappers
Lawrence Berkeley National Laboratory