California requires utilities to offer dynamic pricing that favors low-cost renewables

The California Public Utilities Commission (CPUC) has mandated a transformative energy policy requiring the state’s three major investor-owned utilities to develop and offer dynamic pricing rates to all customer classes. This groundbreaking decision represents a fundamental shift in how electricity is priced and consumed in the world’s fifth-largest economy. The new pricing structure features hourly rate variations that closely reflect wholesale electricity costs and grid conditions, creating financial incentives for consumers to shift their usage to periods when renewable energy is most abundant. This policy aims to reduce solar curtailment, decrease carbon emissions, enhance grid reliability, and ultimately lower electricity costs for consumers while accelerating California’s transition to a clean energy future .

1 Policy Framework and Implementation Timeline

1.1 Regulatory Foundation and Scope

The CPUC’s dynamic pricing mandate stems from the California Energy Commission’s Load Management Standards, which require large utility customers to have access to these optional rates by 2027. The commission’s decision establishes a comprehensive framework for how utilities must design their dynamic rates, with specific guidelines for cost recovery to ensure customers receive accurate price signals. This decision represents the first phase of a two-part implementation process, with the second phase occurring within individual utility rate cases where the CPUC will review specific proposals .

The policy affects Pacific Gas & Electric (PG&E), Southern California Edison (SCE), and San Diego Gas & Electric (SDG&E)—the three largest investor-owned utilities in California. These utilities must develop “demand flexibility rates” where prices change at least hourly in response to the changing wholesale cost of electricity and other factors. The ruling also allows utilities the option to include energy export compensation for customers with battery storage systems, though these export rates would be lower than import rates .

1.2 Implementation Challenges and Timelines

Despite the state’s ambitious goals, implementation across California’s diverse energy landscape faces significant challenges. The Sacramento Municipal Utility District (SMUD) reported that implementing hourly or sub-hourly pricing would cost $2.4–$3.7 million annually to operate. After two years of active recruitment, only 700 customers had signed up for its critical peak pricing plan, indicating potential consumer reluctance .

Similarly, the Los Angeles Department of Water and Power (LADWP) stated that implementing dynamic rates by the 2026 deadline would create “extreme hardship,” primarily due to its lack of advanced meters. Instead, LADWP is focusing on electric vehicle managed charging and other programs as alternatives to real-time rates .

The CPUC has acknowledged these implementation challenges while maintaining the 2027 target for widespread availability of dynamic pricing options. Utilities are proceeding cautiously, with full implementation expected to unfold gradually rather than simultaneously across all service territories .

2 Technical Structure of Dynamic Pricing Models

2.1 Rate Design Components

California’s dynamic pricing structure incorporates multiple components designed to provide accurate price signals that promote economically efficient load shifting and support grid reliability. The wholesale electricity cost component forms the foundation of the new rates, creating a direct relationship between consumer prices and the actual cost of electricity in wholesale markets. This component is expected to significantly reduce solar curtailment by creating demand when solar generation is high and electricity costs are lowest .

Additionally, the rates include a distribution grid cost component based on the marginal cost of expanding distribution infrastructure. This element, advocated by the Solar Energy Industries Association, aims to support efficient utilization of the distribution grid and potentially reduce long-term distribution upgrade costs, ultimately saving customers money .

The CPUC has also mandated several customer protection mechanisms to enable wider adoption of flexible rates “without creating large structural bill impacts.” One innovative approach involves two-part subscription tariffs that include a customer-specific load-shape subscription billed at the otherwise applicable tariff rate. CPUC staff cited a Lawrence Berkeley National Laboratory study finding that this approach would minimize impacts on customer bills and utility revenue recovery while incentivizing load-shift behavior .

2.2 Comparison with Traditional Rate Structures

3 Benefits for Renewable Integration and Grid Management

3.1 Reducing Renewable Curtailment

One of the primary objectives of California’s dynamic pricing initiative is to address the growing challenge of renewable energy curtailment. California frequently produces more solar energy than the grid can consume during midday hours, particularly in spring months when demand is low but solar production is high. This necessitates paying neighboring states to take the excess electricity or simply shutting down solar farms—a process known as curtailment .

By creating price signals that reflect the actual abundance of solar generation, dynamic pricing encourages consumers to shift their electricity usage to periods when solar power is most plentiful. This reduces curtailment while simultaneously decreasing the need for fossil fuel-powered generation during evening hours when solar production declines but demand remains high—a phenomenon known as the “duck curve” .

3.2 Enhancing Grid Flexibility and Reliability

Dynamic pricing significantly enhances grid flexibility by creating financial incentives for demand-side response to grid conditions. A 2022 study by Pacific Northwest National Laboratory found that achieving flexible demand for power with dynamic prices nationwide would yield annual system savings of $33–50 billion .

The EV charging sector provides a compelling case study of this potential. A recent pilot program called ChargeWise California demonstrated that dynamic pricing signals combined with automated charging management achieved up to 98% of EV charging load delivered during off-peak hours. This significantly outperformed the 60–70% typically achieved by time-of-use rates alone, or the 90% achieved by combining TOU with managed charging programs .

These results highlight how dynamic pricing can help balance the grid by shifting flexible loads like EV charging to periods when renewable generation is high but demand is otherwise low. This reduces strain on the grid during peak periods and enhances overall system reliability .

4 Customer Impacts and Protection Mechanisms

4.1 Bill Savings and Economic Benefits

Dynamic pricing offers significant economic benefits for customers who can flexibly manage their electricity usage. The ChargeWise California pilot demonstrated that dynamic pricing could save EV drivers approximately $200 per year by cutting energy costs. Perhaps more significantly, the program showed that dynamic pricing can benefit utility customers who do not drive EVs by lowering total system costs .

Researchers estimate that aligning rates with grid-wide and local distribution signals will unlock over $1,000+ in annual system value per EV. This value comes from reduced need for grid infrastructure investment, lower wholesale electricity costs, and improved utilization of existing resources .

For solar customers, dynamic pricing creates new opportunities to maximize the value of their installations by shifting consumption to periods when their panels are producing electricity and exporting excess power when prices are most favorable. Though California has transitioned from net metering to net billing (also called NEM 3), which bases export rates on wholesale electricity prices rather than retail rates, dynamic pricing provides more transparent signals for when to consume versus export solar generation .

4.2 Equity Considerations and Protection Mechanisms

A significant concern with dynamic pricing models is their potential impact on vulnerable communities and customers with limited ability to shift their electricity usage. The CPUC has explicitly addressed these concerns by requiring utilities to implement robust customer protection mechanisms .

One innovative approach developed through the ChargeWise California pilot involves submetering solutions that provide targeted incentives for customers to dynamically optimize their EV load without subjecting their entire household consumption to variable rates. This “rate add-on” or “type-of-use” approach ensures equity by allowing participation from customers without the full suite of flexible technologies like home batteries, solar, and EVs .

This targeted approach has proven highly effective, with over 1,000+ customers enrolling in just two months, and more than 50% living in disadvantaged communities. By contrast, applying dynamic rates to all customer load risks repelling customers without flexible technologies, potentially increasing costs for those least able to shift usage .

Other protection mechanisms include two-part subscription tariffs that function similarly to baseball season tickets, where customers pay a fixed subscription fee for a predetermined consumption pattern plus variable costs for deviations from this pattern. A Lawrence Berkeley National Laboratory study found that this approach would minimize impacts on customer bills and utility revenue recovery while still incentivizing load-shift behavior .

5 Technological Enablers and Infrastructure Requirements

5.1 Smart Meter Deployment and Advanced Connectivity

Widespread implementation of dynamic pricing requires advanced metering infrastructure capable of measuring and recording electricity consumption at hourly or sub-hourly intervals. California’s investor-owned utilities have largely completed deployment of smart meters to their customers, but many publicly owned utilities (including LADWP) lag in this critical infrastructure .

The state’s five largest utilities are already required to post and update at least hourly their existing and newly adopted time-varying rates in the state’s MIDAS database, creating transparency and enabling third-party innovation in energy management solutions .

5.2 Automated Demand Response Technologies

The full potential of dynamic pricing will only be realized through widespread adoption of automated demand response technologies that can respond to price signals without requiring constant customer attention. The CPUC noted that certain electricity-consuming devices can already shift consumption dynamically in response to price signals using software and communications capability, with more such devices expected to enter the market .

The EV sector again provides a compelling example of how automation enables effective response to dynamic prices. The ChargeWise California pilot achieved its remarkable 98% off-peak charging rate through seamless integration of dynamic pricing with automated charging management. As one participant noted: “Enrolling in MCE Sync was incredibly easy, and it has made managing my EV charging so simple. I love being able to track my energy consumption and see how much I’m saving each month” .

This combination of dynamic pricing with automation and clear customer engagement makes participation easier, reveals value for both customers and the grid, and drives greater system-wide impact .

6 Future Outlook and Development Trajectory

6.1 Expansion to Other Sectors and Applications

While initial implementation focuses on electricity pricing, the principles behind dynamic pricing could expand to other energy sectors and applications. The building sector represents a particularly promising opportunity, as smart thermostats and HVAC systems can respond to price signals to precool or preheat buildings during periods of abundant renewable generation .

Similarly, industrial and agricultural customers represent significant sources of flexible demand through processes that can be shifted to different times without affecting output quality. A Lawrence Berkeley National Laboratory study leveraging smart meter data for more than 400,000 California utility customers—spanning residential, commercial, industrial, and agricultural customers—found substantial potential for load shifting across all customer classes .

6.2 Integration with Distributed Energy Resources

Dynamic pricing creates new value streams for distributed energy resources including rooftop solar, battery storage, and flexible demand. By providing transparent price signals that reflect grid conditions, dynamic pricing enables owners of these resources to optimize their operations for both personal savings and system benefits .

For solar customers, dynamic pricing provides clearer signals about when to consume self-generated electricity versus export it to the grid. For battery owners, price differentials between periods of abundance and scarcity create opportunities for arbitrage—charging when prices are low and discharging when prices are high .

Perhaps most importantly, dynamic pricing aligns the economic interests of individual customers with system-wide needs, creating a virtuous cycle where customers save money by simultaneously supporting grid reliability and renewable integration .

Pioneering a More Flexible and Renewable-Friendly Grid

California’s mandate requiring utilities to offer dynamic pricing represents a groundbreaking step toward a more flexible, efficient, and renewable-friendly grid. By creating price signals that accurately reflect the changing wholesale cost of electricity and grid conditions, this policy incentivizes consumers to shift their usage to periods when renewable energy is most abundant—reducing curtailment, decreasing carbon emissions, and enhancing grid reliability .

While implementation challenges remain, particularly for utilities without advanced metering infrastructure, early results from pilot programs show tremendous promise. The remarkable success of dynamic pricing in managing EV charging—achieving 98% off-peak delivery compared to 60–70% with traditional time-of-use rates—demonstrates the transformative potential of this approach .

Perhaps most importantly, California’s policy includes robust customer protection mechanisms to ensure that the benefits of dynamic pricing are accessible to all customers, regardless of their ability to shift consumption patterns. Through innovative approaches like targeted EV charging rates and two-part subscription tariffs, California is pioneering a model that other states will likely emulate as they increase their renewable generation and seek to maximize its utilization .

As California continues its transition toward a 100% clean energy future, dynamic pricing will play an increasingly important role in balancing supply and demand while minimizing costs and maximizing reliability. This policy represents not just a change in how electricity is priced, but a fundamental transformation of the relationship between utilities and customers—from passive ratepayers to active participants in building a more sustainable grid .