Pay for electricity differently

The author is a professor at HEC Montréal and holder of the Chair in Energy Sector Management. He is notably an expert in the field of energy policy and electricity markets.

At one point, all of our long distance calls were billed by the minute. Now, monthly plans with unlimited calls are very common. Before, to see a single movie, you had to pay a fixed price. Today you can pay a monthly fee and watch all the movies you want. With the evolution of technologies and markets, the forms of payment are transformed.

Now think about electricity: has the way you bill it changed in the last 75 years? The short and complete answer is no. Hydro-Québec counts the number of kilowatt-hours (kWh) you have consumed and makes you pay for them. The price has obviously gone up, and that is what is generally talked about a lot. But we are not going to discuss it here. Rather, we will address the approach used to charge us for this essential service. Should we always pay for electricity based on kilowatt-hours consumed? With the evolution of technologies and the new energy transition context, wouldn’t it be time to change things, as telecommunications and cinema have evolved?

Anatomy of an invoice

The electricity bill is mainly made up of a price per kilowatt hour: 6.16 ¢ for the first 40 kilowatt-hours consumed daily, and then, if it exceeds those 40 kWh, you pay 9.50 ¢ / kWh. If you live in a five-and-a-half with electric heating, your consumption is about 32 kWh per day (annual average), or $ 60.63 per month. If you live in a 1,200-square-foot single-family home, your usage is approximately 56 kWh per day ($ 123.94).

In addition to this variable cost of energy, there is a fixed cost of 40.17 cents per day, known as the “grid access charge.” For a 31-day month, that drops to $ 12.45. This fixed cost is the same for the apartment and for the single-family home… while the electrical installations necessary to supply a single-family home are much more important than those that allow electricity to be brought to an apartment. In a building, all the dwellings are billed individually, although they share a single connection.

This is very egalitarian, but not necessarily fair: The low-income senior in their three and a half years will pay the same fixed monthly cost of $ 12.45 as a household that lives in a monster house with a heated pool and spa, and its two or three indoor parking spaces. It goes without saying that the equipment of the electrical network for this subscriber is more imposing and expensive than for our elderly person. It doesn’t matter, with the current approach: it’s the same deal for everyone, regardless of the infrastructure needed to serve different types of consumers.

Time to change that. Not only for fairly obvious equity reasons, but also because the energy transition requires us to make changes. That is good news, technology allows us to do this and we are used to these changes, thanks to developments in other sectors.

If the energy transition requires a change in billing, it is above all because we can and must reduce our energy consumption. And then because Hydro-Quebec’s costs are essentially fixed costs: network costs.

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Fall in income at sight

Let’s start by reducing energy purchases. Consumers can now generate decentralized solar power and live in highly efficient homes. While buildings built before 1950 consume more than 250 kWh per square meter per year for heating (where more than 60% of the energy goes), those built after 2005 have less than 100 kWh. With the most efficient standards (those of passive houses), it is possible to achieve a consumption of only 15 kWh per square meter per year for heating! These are reductions of more than 90% in energy consumption.

Even for existing buildings, significant reductions can be achieved by working on insulation. If these buildings are also equipped with solar panels, their occupants will hardly buy kilowatt-hours from the electricity grid. Hydro-Quebec’s sales will fall, as will its income, if the form of payment remains the same.

In itself, the fact that Hydro-Quebec comes to sell less electricity to Quebecers is not a problem. It is even desirable, since we will be able to electrify other uses, increase exports and close our neighbors’ natural gas electricity production plants.

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The problem is rather that the Hydro-Quebec network will continue to be needed. Even efficient houses with solar panels will stay connected so their owners can buy kilowatt-hours when the sun is not shining or resell their surplus production. If Hydro-Québec does not have enough income to maintain power lines and modernize its equipment, no one will be the winner. Therefore, it is imperative to find a sustainable way to increase energy efficiency and reduce electricity sales, all without compromising financial balance.

Since the costs of producing, transporting, and distributing electricity are essentially fixed, there will inevitably be a deficit if kilowatt-hour sales decline. The cost of dams, transmission lines, transformers and poles does not depend on the kilowatt-hours produced and consumed. If the reduction in consumption is 10%, it is not possible to reduce the entire network by 10%. A bit like Netflix, for which the costs do not change, whether we watch 1 or 30 movies per month, Hydro-Quebec costs do not change, whether we consume 10 or 300 kWh per month.

Ready for 21st century pricing?

The issue of fixed operating costs is problematic because energy efficiency should not be a threat to Hydro-Québec’s financial health. However, there is a simple solution. It is enough to bill customers more in proportion to the size of their connection and the maximum use of the network, and less in proportion to their consumption. Owners of large houses with heated pools will pay more for their electrical connection, while the elderly in a small apartment will pay much less.

Not only will prices be fairer, but Hydro-Québec’s revenues will thus stabilize. A related but very important benefit is that consumers will benefit from reducing their connection size and peak consumption, which will be extremely beneficial for energy management, which is an increasingly pressing issue for consumers.

In short, we must move on to 21st century pricing, as many other industries have done. Why don’t we talk about it in electricity? Because we are very cautious, in Quebec, when it comes to electricity rates. However, we must have the courage to change if we want to improve our lot with the energy transition, rather than endure it by trying to get it to embrace our past practices.

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