A New Pricing Paradigm

As consumer-driven energy sources progress, TVA is preparing its business and adjusting pricing to ensure fairness and low rates for everyone. Cass Larson, TVA’s vice president of Pricing and Contracts, provides an eye-opening look into the future.

When electricity was new to the world, energy companies charged by the light bulb. As technology advanced and new devices were invented, this way of pricing had to evolve. Once again we find ourselves in a market where technology is changing the energy industry—and this time it’s well beyond irons and refrigerators.

Today, people have unique ways to access and use energy. Rather than simply purchasing energy from local power companies, consumers have—and are exercising—the option to generate a portion of it themselves using technologies like solar panels. According to TVA’s Cass Larson, vice president of Pricing and Contracts, this is a seismic shift. Power companies will once again need to reframe how they price energy to bill fairly and protect shared assets, such as the transmission grid, that will continue to provide energy for the majority of Americans—and serve as the backup system for all.

To explain the situation, Larson points to a more modern dilemma. “Consider our roads and gas tax,” he suggests. “The gas tax pays for road construction and maintenance. With more electric cars, who pays to build and maintain our roads? The burden shifts unfairly to gasoline cars. And what happens when gas consumption continues to drop? There may be insufficient funds to cover this vital infrastructure.”

TVA, now facing much the same scenario, is taking steps to change the way it prices power to protect the interests of all 9 million residents of the Valley, and to create inherent stability: “Our long-term goal is to ensure the energy grid remains available to everyone. To do this, we will have to change our pricing, which will continue to support vital grid services and result in more predictable power bills for residents each month.”

We sat down with Larson to learn more about this paradigm shift. Here’s what he had to say.

What is driving the change in the energy industry?

Technology. Today, consumers can lower their bills through energy efficiency and even make some of their own energy. Power companies that don’t adapt and reinvent themselves won’t be able to ensure the safety, reliability and resilience consumers have come to expect.

A good example of a company who did not adapt their business is RadioShack. RadioShack went from the largest technology retailer to a memory because of changing technology. They sold answering machines, calculators, radios, computers and electronic organizers, all of which your smart phone, in one device, can now do.

Similarly, technology is forcing every energy company in America to change. At TVA, we need to be ahead of the game for the people of the Tennessee Valley.

What does the future power company look like?

From a physical makeup, consumers will see little difference. Electric wires will still come into your home or business. What those wires are connected to, however, may be completely different. In the not-too-distant future, your wires may be connected to electric vehicles, a personal solar or wind system that charges batteries or a personal technology that has not been invented yet.

Long term, we are thinking the future energy grid will continue to be the safety net if your home or business cannot generate its own power. That is a complete paradigm shift for the industry—and for consumers.

As technology changes and consumers are able to generate and possibly store their own energy, how does this shift the paradigm?

Most power bills are based on the amount of energy you use. It is simple—cut your usage and you cut your bill. As consumers use new energy efficient technologies, their bill naturally goes down because they are using less energy. And we are in a good place with that scenario.

TVA is well positioned to absorb declining load growth as we have reduced costs by $800 million and invested about $16 billion in new technology that will lower our rates in the long run. Watts Bar 2 nuclear unit and Allen and Paradise combined cycle plants are great examples of investments that will continue to help lower costs. Between operations and maintenance and fuel costs, we have achieved almost $2 billion in savings per year, and we expect that to be sustainable.

Even with these actions, however, when technological advancements progress to the point where more homes and businesses use less and less electricity, our current pricing structure—based mainly on usage—would not cover the costs of maintaining the grid.  We need to recognize how important grid services are for those using new technology and ensure our pricing model protects the reliability and resilience the grid offers.

If we look at those who are pursuing energy efficiency and solar technology, they are the companies and people who can most afford it—and current electricity pricing is providing too large an incentive for them to do so. Those who cannot afford to invest in cutting-edge technology are the ones left to make up the difference.

Regardless of what the future holds, we need to act now and prepare consumers for possible changes in how they are billed—and develop solutions that are a win for everyone.

Why talk about the need to make changes now?

TVA and your local power company are public power, and the hallmark of public power is that we do what’s in the best interest of those we serve. So we need to start the conversation now as our residents will be affected.

At TVA, we are preparing for technology that allows people to use alternative energy sources. We are starting the conversations to ensure energy rates are in line with changing technologies and everyone understands those impacts.

Today, there are 3,200 solar locations in the Valley, and the system can handle it. In our current pricing structure, solar generators who use the grid at night or when it is cloudy effectively have everyone else pay for their “backup.”  When technology changes to allow mass adoption of self-generation, the maintenance of the grid will fall upon those who cannot afford to generate their own power.

Why is doing nothing not an option?

Change is inevitable, and technology is changing. It’s forcing us to keep up. The question is how fast do we change?

Right now we are not at a crisis point. But we do need to start taking steps to stay ahead of what is coming. By starting to take action now, we avoid having to react later—and it lets our customers know where we are headed so they can make better, more informed decisions.

How does this play out for energy consumers?

We are mandated by the Tennessee Valley Authority Act to keep rates as low as feasible. The key is to go slow and be deliberate to ensure we are fair to everyone as change happens.

We are looking at a model in which the more energy you use, the more the price goes down; and the less you use, the higher the price you’d pay. It is the same principle as buying in bulk at the grocery store.

We already have some of the lowest power rates in the country. Making energy even more affordable will incentivize businesses to locate to the Valley to use our clean, low-cost, reliable energy.

This will have a particularly vitalizing effect on economic development—attracting energy-intensive businesses to the Valley, and encouraging expansion among businesses already here—which means more, higher-paying jobs for Valley residents.

Is TVA trying to discourage renewable energy?

No. TVA offers renewable energy programs as part of our portfolio and will continue to evolve those programs.

What we are trying to do is promote renewable energy that benefits everyone. We’re simply preparing for what we think the future holds, and communicating that to our partners. This will allow people to make smart choices—for them and for the entire Valley.

The fairest way to incorporate renewable energy is to build large-scale solar. Large-scale solar facilities ensure that everyone benefits. First, larger scale is much less expensive than smaller, more local generation. Also, no one is subsidizing solar power for a neighbor. Currently, someone who is using, say, private rooftop solar is creating energy that literally is not needed in the Valley, and everyone else has to pick up the cost of the grid. In addition, large-scale solar solutions mean people don’t have to deal with rooftop construction and maintenance.

Another solution is community solar, which is an option for residents who want to get involved with renewable generation. Community solar becomes part of our system, and no one has to unfairly subsidize it.

So what’s the bottom line?

We want the “energy future” to be fair to all 9 million people of the Tennessee Valley. There is no easy solution, nor is there a single solution.

Fundamentally, TVA has a clean, reliable, diversified generating portfolio to keep rates low. We need to work together to support the Valley’s energy needs—without adding costs to the whole system. As we look to the future, we will need to adjust our pricing to make sure it is fair to everyone, and that no one is subsidizing anyone else’s private generating sources.

Ultimately, our goal is to keep rates as low as feasible while providing reliable grid service for everyone. Together, we will be doing that, just in new ways.

Low Rates Make Life Better

TVA's mission is to make life better for the people of the Tennessee Valley. One way it does that is by keeping energy rates as low as is feasible, as is mandated by the TVA Act of 1933. To learn more about how TVA keeps rates low—and how low rates translate into good jobs and a high quality of life—we sat down for a question-and-answer session with TVA Chief Financial Officer and Executive Vice President John Thomas. Here's what he had to say.