Brattle Group's Sanem Sergici shares what utilities can do to get ahead of rising rates.
Back in the early 2000s, Sanem Sergici met some researchers from The Brattle Group at an energy industry conference. She was pursuing a doctorate in applied economics at the time, and decided that a Brattle Group internship would be the perfect way to spend that summer. If one existed...
It took some work, but Sanem convinced the firm that it needed an internship program. Twenty years on, that effort paid off. She’s now a partner at the firm — and she’s one of the power sector's leading experts on rate design and grid economics.
This week on With Great Power, Sanem shares what recent Brattle research shows about how utilities can use technology, markets, and smarter rate design to address rising costs without leaving customers behind.
Credits: Hosted by Brad Langley. Produced by Mary Catherine O'Connor. Edited by Anne Bailey. Original music and engineering by Sean Marquand. Stephen Lacey is executive editor. The GridX production team includes Jenni Barber, Samantha McCabe, and Brad Langley.
Brad Langley: Sometimes it feels like the universe is trying to tell you something. For Sanem Sergici, that moment came on August 14th of 2003.
Sanem Sergici: Literally minutes after I landed at JFK and made it through customs, all the lights went out.
Brad Langley: Sanem was traveling from her home in Turkey to Northeastern University in Boston to start her doctorate in applied economics. But getting there suddenly became a huge challenge.
Media clip: …the blackout lasting about 30 hours in New York, shutting down the subway system, gas pumps, traffic lights, elevators, and more…
Brad Langley: The incident started because of an overloaded power line in Ohio where an alarm failure at the local utility led to a cascading outage. The blackout would ultimately impact a staggering 50 million people.
Sanem Sergici: And I remember thinking this has to be some sort of a sign. Maybe moving 5,000 miles away from home wasn't such a great idea after all. And I was thinking, I'm still at the airport. I could just take a flight back home. It's not too late.
Brad Langley: But she didn't. She stayed. And within her first few days of grad school, she started wondering if that power sector disaster had been a sign, but in this case, a good one.
Sanem Sergici: I became a research assistant to Dr. John Kwoka. He's a renowned economist in industrial organization and regulatory economics who does a lot of research in electricity power industry.
Brad Langley: Including research into grid reliability. He inspired Sanem to study the sector too. A couple years later, she was giving a talk about their work at a conference when she met a principal at the Brattle Group.
Sanem Sergici: Brattle was doing a lot of dissimilar work in the aftermath of California energy crisis. And I was like, "You know what? Maybe I should spend the summer at Brattle ."
Brad Langley: The only problem was that Brattle didn't have a summer associate role, so Sonom convinced the firm that it needed one.
Sanem Sergici: That summer internship turned into a 20-year career so far and counting. It's been a good ride so far.
Brad Langley: Over those two decades, Sanem has become a leading power sector expert. Brattle Group research reports get a lot of industry attention, but lately, thanks to rising electricity prices, weather-related outages, and increased focus on the grid, her friends and neighbors also want to talk shop.
Sanem Sergici: I really try to give them a flavor for why they're seeing these rate increases. And the utilities and the regulators are not really bad guys after all. They're all working towards the same goal. It's just that we're catching up, honestly. We're catching up with a lot of investments that maybe should have happened earlier.
Brad Langley: Experiencing that blackout back in 2003 led Sanem to want to better understand how the grid works and to help others understand too.
Sanem Sergici: A couple of weeks ago in my neighborhood, my local utility Entergy had to shut off power to be able to do some critical infrastructure maintenance further down the road. And there was a lot of neighborhood Facebook complaints about that. And I just wanted to say, "Hey folks, this utility's doing this so that next time we hit 110 degrees, you all will still have air conditioning."
Brad Langley: This is With Great Power, a show about the people building the future grid today. I'm Brad Langley. Some people say utilities are slow to change, so they don't innovate fast enough. And while it might not always seem like the most cutting edge industry, there are lots of really smart people working really hard to make the grid cleaner, more reliable, and customer-centric. Today, my guest is Sanem Sergici, a partner at the Brattle Group. We talk about some of her recent reports looking at how utilities can use technologies and markets to address the affordability crisis. But first, I asked Sanem to talk about the trends she's seeing in one of her areas of focus, rate design.
Sanem Sergici: A few trends stand out for me. First of all, time of use rates are moving beyond pilots and the objective has broadened. It's not just about reducing the system peak anymore, it's about encouraging EV charging, electrification when electricity is inexpensive, and responding to changing that load shape created by solar and ultimately enabling much more automated load flexibility. Second, we're paying more attention to how we recover capacity and grid costs. For commercial and industrial customers, demand charges have always obviously been around forever, but there's more scrutiny now around which measure of demand actually causes the costs. Is the customer's individual peak or their contribution to system peak or the local peak? We see that standby rates are being revisited in a lot of jurisdictions and we are even seeing some renewed interest in residential demand charges.
Third, electrification is leading to more technology specific rates. EV rates are obviously an early example of that, but increasingly we are thinking about many charging rather than simply TOU rates for EVs. We are also seeing a lot of interest that improve the economics of heat pumps while encouraging the efficient use of grid. So there are some optional rates out there that really make a difference for customers who have heat pumps. And there are two newer developments that I think are particularly important. DER, distributed energy resource compensation is gradually moving away from traditional net metering toward compensation that reflects when and where energy is delivered and large loads, and I can't believe we've made it into the first five minutes of this conversation and this is the first time we're saying large loads that usually happens earlier, that they have essentially created a new branch of rate design where we're not just allocating costs, but we are allocating risks to the rate design.
Overall, we are moving from a fairly static view of rate design towards something much more dynamic where rates are increasingly becoming grid management tools as well as cost recovery tools.
Brad Langley: So we won't go much longer without talking about large loads. There is a debate over whether large load tariffs can stabilize or lower bills for rate payers and whether they can also potentially improve grid stability. Last year, LBNL and Brattle issued a report on the practices and opportunities in using large load tariffs, and you recently published an update to that report. So what are some good design elements for large load tariffs based on this research?
Sanem Sergici: Yeah, I would start with two principles, Brad. First is that existing customers shouldn't be asked to subsidize the costs or absorb the unusual risks created by a very large customer. And second, we shouldn't design these tariffs simply to extract as much revenue as possible from these large customers. We want them to have an incentive to locate and operate in ways that actually benefit the system. Our recent work with Berkeley Lab that you mentioned looked at 55 large load tariffs and frameworks, and we're seeing some fairly clear practices emerging. The first set of provisions is about protecting other customers if the load doesn't develop as expected. So we're seeing minimum bills, take or pay provisions, longer contract terms, exit fees, collateral and credit requirements. Essentially, if the utility bills infrastructure for a customer and if that customer arrives late, uses much less electricity than expected or leaves early, other customers shouldn't be left holding the bill.
So that's an important principle that all of these tariffs are trying to meet. The second piece is cost responsibility. Customer specific infrastructure and the incremental system costs needed to serve these customers should be appropriately reflected in what they pay. But I think the most interesting, and I would say still emerging development is the third piece, which is giving these large customers a way to reduce the costs that they create. So if a data center can curtail during a handful of constrained hours or use storage or staff generation or otherwise provide defensible flexibility through aggregated distributed energy resources, then it may be possible to connect that customer sooner or avoid or reduce some generation and network investment.
Brad Langley: And on that latter point, how are the hyperscalers reacting to that? Because it seems a little bit counterintuitive with AI and the data requirements only increasing. The idea of flexing demand, I have to imagine gives them a little bit of pause. Are they open to this through these price structures or what kind of feedback are we getting from the data center operators themselves?
Sanem Sergici: Yeah, I mean I would say that it's still early days, Brad, but at the beginning the conversation was that these hyperscalers did not want to have anything to do with flexibility, but more and more I think they really realized that this is one of the ways in which they could get speedy access to power and also reduce the cost for themselves as well as the grid overall. So I think that they're figuring out ways to provide some of this flexibility and there are innovative models that are coming up. So I think what they're more open to is instead of them flexing a large data center or a large flexing itself, they're more willing to use and aggregate resources, distributed resources and contribute towards compensating those resources so that they can provide that flexibility, which is again, one way to achieve that flexibility. So I really think that maybe two years, three years from now, we will look back and we will say we can't believe there were these couple of years of periods where data center tariffs did not include any flexibility provisions.
I think it will be a very common future of data center and large load tariffs.
Brad Langley: Brattle also performed some research for the utility Alliant, which looked at the potential impacts of large loads on electricity prices, and this summer you released those findings. Can you walk me through some of the highlights of that research?
Sanem Sergici: Yes, happy to. The most important conclusion of this study is probably that large load growth does not inherently mean higher electricity prices for everybody else. There's a fairly simple economic intuition behind that, especially for vertically integrated systems. As you know, utilities have a lot of fixed costs, and if a new customer comes onto the system and they pay their incremental costs plus some more, then this additional revenue can help spread those existing fixed costs over a larger sales base. It can also improve utilization of generation, transmission, and distribution assets that already exist in that system. So for Alliant, Iowa and Wisconsin utilities, we found relatively favorable conditions for that to happen. They have contractual protections for large customers, substantial utility on generation, and relatively limited exposure to volatile capacity market costs, which as you know, one of the main issues for PJM utilities that they really have to interact with the capacity market to be able to serve these customers.
So what that means is that I wouldn't take that result and say that data centers lower rates because that's very nuanced and that's too broad. But what I would say is that framework that we established in that study applies almost everywhere because you ask what additional revenues does this customer bring and what additional costs does the utility incur to service its customer? And now you need to account for the risk that the load forecast doesn't materialize. And also the answer depends on the utility starting point. Does it have generation headroom? Does the transmission system have capacity? Does it need to buy expensive new capacity? Is it through capacity markets or can it build this capacity? How large are the network upgrades and how strong are the contractual projections? So it's very, very nuanced, but the Alliant study demonstrates that there's a pathway by which large load growth can benefit existing customers, and it doesn't establish that this will happen automatically, but there are certain circumstances that will increase the likelihood of large loads and data centers reducing rates for other customers.
Brad Langley: You guys have been busy because in another recent paper you envisioned a framework under which DERs could better support speed to power. That paper describes the ways that load growth has changed the value proposition of DERs. Talk us through that paradigm shift.
Sanem Sergici: I mean, like you said, that idea follows directly from the large load discussion. Historically, when we talked about the value of distributed energy resources, batteries, demand response, managed EV charging, we usually talked about deferring infrastructure, so slowing the pace of investments. So if a DER reduces the demand on a constrained part of the grid, perhaps a utility can postpone an upgrade for several years and achieve savings associated with that deferral. So we really were in that paradigm for many, many years, but rapid load growth creates another source of value for these DERs. So imagine a large load who wants to connect in two years, but the grid upgrade needed to serve that customer perhaps won't be ready until year five. So if distributed energy resources can reliably reduce demand during the constrained hours, then they may create enough headroom to connect that customer sooner. So this is what we mean by speed to power paradigm.
DER is physically doing the same thing in both cases, reducing or shifting demand, but the economic value is quite different because in the traditional deferral paradigm, the benefit is the time value of postponing that investment, time value of money associated with that. Under the speed to power paradigm, the benefit is the value of enabling this economic activity earlier and utility revenues that come with it, customer operations, the benefits for existing customers if their rates go down, jobs and tax revenue. So there are other benefits that apply to different stakeholders than the utility itself. So the paper doesn't really suggest that we should replace the deferral paradigm or we should just leave it behind. We're saying that in a capacity constrained, rapidly growing system, speed to power becomes yet another DER value system that should be considered, and we don't have a good framework right now to do that.
Most of the DER valuation frameworks are really based on the traditional avoided deferral cost basis.
Brad Langley: So if data centers and large load growth is kind of concern 1A in our industry, affordability is concern 1B, and you can make the argument that those could easily be swapped. So we've talked about developments of rate design, large loads, and how DERs are used and can be used to address grid needs. But zooming out, what does this all mean for affordability?
Sanem Sergici: So ultimately, I think affordability requires us to do two things at the same time. The first is we need to lower the total cost of the electricity system. Better rate design can shift consumption away from expensive hours. Well-designed large load tariffs can ensure that new customers cover the costs and risks that they create, and distributed energy resources can help us use existing infrastructure more efficiently before we build more of it. But we also have to recognize that not every customer has the same ability to respond to those price signals or invest in these new technologies and distributed resources. So that's where targeted affordability programs come into the picture. These are things like income-based discounts, percentage of income payment plans, weatherization, area grid management, and subsidized access to technologies such as smart thermostat, heat pumps, and batteries. And there are different models across the country on this.
California, for instance, has focused heavily on subsidizing access to enabling technologies for lower income customers, whereas New York has mechanisms for sharing DER created value with lower income customers and Massachusetts combined low flexibility programs with income targeted rate discounts. So I don't think the choices between economic efficiency and affordability. The goal should be to use rates, large loads and distributed energy resources to make the overall system less expensive and then make sure that lower customers are not left behind and they can participate in and benefit from those savings.
Brad Langley: I'm curious, what's your overall take on the status of time varying rates, TVRs, across the country? Are you happy with where we're at? How are utilities doing? And perhaps more importantly, are we doing enough to get customers successfully on them?
Sanem Sergici: Brad, I've been basically trying to get TOU rates and time varying rates implemented and adopted more widely over the course of 20 years of my career. And I am trying to stay optimistic and say that we're making progress, but our pace is pretty slow and that slow pace is because there are not many jurisdictions still who are not deploying time varying rates as default rates. There are many jurisdictions out there that are rolling out these rates, but they're opt-in. And we know the power of default. When you default customers, they will experience these rates and they will understand that, look, they're not very difficult to deal with after all. And then all of a sudden you will maybe have 5% or 10% of the customers who truly decide that they don't want to be on these rates and they opt out, but then you've got 90% of the customers who are staying on these rates and it's a numbers game.
But if 90% of the customers are giving you that small peak reduction, and when you do that multiplication, all of a sudden you have an important system peak reduction and your headroom right there. As you can tell, I really think that we ought to be in a place where I think a lot more jurisdictions and utilities should be thinking about default rates. But I think that if our goal is to really utilize these rates as a grid resource, the course is going to be having as many customers as possible on these rates.
Brad Langley: Well, and it doesn't have to be an either or. You can start with small opt-in pilots and move to default. I think there's lots of grid examples across the country. PSEG Long Island is one of them. Started with a small pilot. Now they got nearly, if not all one million customers at least defaulted into, and yes, they've had very small opt-out rates. But because there are examples of this being successful and you can start small and move bigger, what continues to be the holdup in your mind for default? How do we get people to realize that this is the best path forward?
Sanem Sergici: I would say it's mostly at the state level and a rate change is often seen as a big deal, and maybe we need more will from the regulators to push and to encourage utilities in that direction because for the longest time our barrier was that most utilities did not have AMI systems. They couldn't really implement these programs at a large scale, but that's not a barrier anymore. I think about 90, 95% of the US customers have AMI meters now. So now the only barrier is essentially somebody deciding that enough with the pilots and maybe just taking it too slow. I'm always a believer in test and learn, but the test and learn should not really just drag on forever. So I think that we need a little bit more push from the regulators in terms of making these rates, allowing utilities to be able to deploy these rates on a default basis.
Brad Langley: California is doing some really interesting work around dynamic pricing. What is your opinion of dynamic pricing? We've seen examples of as California goes, eventually the rest of the country will go. Are you feeling bullish on the potential for dynamic pricing in other states across the country?
Sanem Sergici: Whatever California does, the rest of the country gets there in about five to 10 years. So dynamic rates and these rates that speak with technologies directly, machine readable tariffs that interact with customer devices. I think those are very neat ideas. I don't know that we have technology barriers. I think that it's all about the need becoming really acute, and I think that we are nearing that point. A lot of places are very capacity constraints and we have this really low hanging fruit in the way of customer response and that response doesn't have to be, again, manual. A lot of devices could be automated without compromising customer experience. And once all those activities are aggregated, we will find a lot of unused capacity or capacity that could be shifted to other times. So I think we will get there, depends on how bad our capacity crunch will look like in the next couple of years, and that could be a motivator.
Brad Langley: We call this show With Great Power, which is a nod to the energy industry. It's also a Spider-Man quote, "With great power comes great responsibility." So Sanam, what superpower do you bring to the energy transition?
Sanem Sergici: I really try to help and move the dialogue to explain the issues as clearly as possible so that those decisions that are important can be made in the best way possible, because sometimes we really suffer from talking off of each other. There are so many stakeholders, they're obviously looking out for their own perspective. I try to bring that independence to the conversations and truly data-driven analysis that we do here at Brattle and provide the facts so that decision making can proceed as efficiently as possible. And in the end, I really think and feel that the work that we do makes a difference for customers.
Brad Langley: Excellent. Well, Sanem, thank you so much for coming on the show. I really enjoyed our conversation.
Sanem Sergici: Thank you so much for having me.
Brad Langley: Sanem Sergici is a partner at the Brattle Group. With Great Power is produced by GridX in partnership with Latitude Studios. Delivering on our clean energy future is complex. GridX exists to simplify the journey. GridX is the enterprise rate platform that modern utilities rely on to usher in our clean energy future. We design and implement emerging rate structures and we increase consumer investment in clean energy, all while managing the complex billing needs of a distributed grid.
Mary Catherine O'Connor produced a show. Anne Bailey is our senior editor. Stephen Lacey is our executive editor. Sean Marquand composed the original theme song and mixed the show. The GridX production team includes Jenni Barber, Samantha McCabe, and me, Brad Langley. If this show is providing value for you, and we really hope it is, we'd love it if you could help us spread the word. You can rate your review us with Apple and Spotify, or you can share a link with a friend, colleague, or the energy nerd in your life.
As always, thanks so much for listening. I'm Brad Langley.