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Saturday, September 3, 2011

Dynamic Pricing

Smart meters don't offer much value to consumers unless coupled with dynamic pricing, and only voluntary programs with proper consumer education and tools are likely to meet regulatory approval and market success. Retail electric rates that reflect actual wholesale market conditions will produce the most economic use of energy. During times of extreme peak usage, the rate should be much higher than a normal peak price.

If consumers are willing to accept more variability in price, they can get a discount from a flat base rate because the cost of delivering service goes down

  • The Smart Grid is not all about technology and consumers will not be engaged to change their energy use behavior without financial motivation. Today most consumers pay the same rate for electricity regardless of when they use it or the actual cost.
  • On the consumer side, dynamic pricing can lower costs and improve reliability. Currently, on a hot day when the electric system is strained, Flex Your Power puts out alerts and the California ISO calls on consumers to voluntarily cut their usage. These voluntary appeals are helpful to shave demand. However, dynamic pricing gives a customer an even stronger motivation to respond.
  • However, no customer is calling saying "I want smart pricing." Educating customers, offering them tools, providing temporary bill protection and offering a menu of dynamic pricing rates needs to be part of the solution.

2. Acronyms/Definitions
  1. Climate Zone – Based on altitude and temperatures for summer and winter, utility service territories are divided into climate zones that reflect the average energy consumption within each zone. Different climates create different energy needs, so baseline allowances vary by climate zone.
  2. Baseline – The starting point in tiered pricing rates. Baseline allowances account for 50% to 70% of the average residential consumption within a baseline zone. Additional baseline allowances are available for customers with special medical requirements.
  3. CARE - California Alternate Rates for Energy - CARE rates are discounted for low income customers
  4. Contract Demand - . At the outset of starting a commercial or industrial account, you may be required to sign a document committing to a specified demand.
  5. CPP – Critical Peak Pricing - Critical Peak Pricing programs offers lower electricity rates in return for setting a rate 3 to 5 times higher than the regular rate on up to twelve "Critical Peak" afternoons during the summer. Generally, the declaration is made one day in advance, but in some cases it is made just an hour before the higher rate goes into effect. Generally, the retail provider is limited – either by regulation or contract – in the number of peak days it can call in a year. At all other times, CPP customers are charged a non-dynamic rate, which may be time-invariant or may be time-of-use (TOU) based. Some CPP programs have multiple levels of critical peaks and associated retail prices, such as “peak” days and “super-peak” days, with the expectation that the higher-price days would be called less frequently. In California, Most classes have optional CPP rates.
  6. CRL – Customer Specific Reference Level - Used to calculate PTR discounts
  7. Demand Limit - Configurable limit by customer subscription Not a common pricing structure in US, but it is in Europe
  8. Demand Charges - Recover capacity-related costs. In California, demand charges are only used for larger customers. For smaller customers, demand charges are recovered through energy charges
  9. Energy Charges - Recover variable costs of generation. Energy charges vary by TOU period based on old PX hourly price variation; this may change with MRTU
  10. Free Rider Savings - Structural savings in a PTR program. These are rebates that customers would receive as a consequence of ordinary variation in their daily energy usage (e.g., if they happen to be on vacation on the day a PTR event is called, but were home during the period reflected in their CRL allowance). Customers will realize additional bill savings under the PTR program if they initiate real demand reduction efforts in response to PTR calls. In practice, each customer will realize a combination of bill savings under PTR (structural and demand response), although such effects must be estimated statistically and could never be measured independently for each household.
  11. IHD – In Home Display - With respect to TURN’s assumption that a customer must purchase an IHD to participate in PTR, PG&E indicates that it has budgeted funds to provide continued support of education and event notification, such as public service messages and press releases. Thus, according to PG&E, although IHDs are critical as an additional notification channel, a portion of PG&E’s customers (particularly in high density urban areas like the San Francisco Bay Area) may learn about PTR events through other media.
  12. OAT – Ordinarily Applicable Tariff - Base rate from which CCP and PTR are calculated.
  13. Peak Demand - A measure of the capacity you require and that your utility is committed to meet under its franchise charter. Your electric meter makes measurements recorded at 15 minute intervals and the peak recorded demand in a billing cycle is what your utility will charge you for. Think of demand as the diameter of a water pipe and the current as water flowing through it.

    That said, tariffs can get a little intricate. There can be time of day rates where you can be billed for peak demands measured during on-peak, shoulder-peak and off-peak hours. Also in regions where capacity is tight, you may find yourself subject to a ratchet whereby your peak annual demand may impact your cost for the next year. Example: If your peak annual demand is 100 kW and there is an 80% ratchet, your minimum billing demand from that billing cycle forward for the next 11 months will be 80 kW. Now if your actual metered demand during those cycles is >=80 kW, no issue - you pay for what you used. But if demand is <80 kW, you pay for the capacity that the utility has obligated itself to meet. The higher the percent of the ratchet the more likely the ratchet will be invoked as the minimum billing demand.
  14. PDP - Peak Day Pricing - A new pricing plan in response to a statewide initiative led by the California Public Utilities Commission (CPUC) for the reduction of peak energy demand. PDP encourages customers to conserve energy when the grid is at or near capacity by rewarding customers who are able to reduce and/or shift their energy use to non-peak periods. PDP offers customers the option of getting power at a reduced price most of the time, if they agree to pay higher prices when the utility is facing peak demand.
  15. PTR - Peak Time Rebate - An incentive for load reduction equivalent to the penalty for increased use under a CPP rate. This formula will be used for California Residential customers instead of a CPP because of legal restrictions in AB1x. Peak time rebate (PTR) is sometimes described as an inverted CPP rate and provides rebates to participants to reduce electricity use during days when electricity demand is the highest (critical peak days). PTR could also be considered a mass-market equivalent of the emergency DR option. The dispatch for PTR is the same as that for CPP. If customers fail to curtail during the event, there is no penalty; the customer simply does not receive the rebate. Like CPP, participants can be notified of critical peak days either a day in advance or on the day of the event
  16. RTP – Real Time Pricing - Under RTP programs, the retail customer is charged prices that change at short intervals, generally each hour, but in some cases as often as every five minutes. In most cases, those prices are set one day in advance, but in some cases the price is set an hour or less in advance, and reflects real-time supply/demand balance even more accurately. RTP requires hourly market price signals to be sent to the end-use customer. This in turn requires a wholesale hourly electricity market which poses difficulties for implementing RTP.
  17. Tiered Pricing – Higher rates for higher use. The more you use, the more you pay. The starting point is “Baseline” amount. Specific to climate zones
  18. TURN – Toward Utility Rate Normalization - Consumer Advocacy Group which questions the business cases of smart grid investments.
  19. Two-Tier PTR Incentive Design - Participants with enabling technology such as automated load reductions devices will be paid a higher incentives to than participants without such devices or displays. Designed to minimize free-ridership. Approved for SDG&E, SCE and PG&E. PG&E is concerned about practical issues for establishing, enforcing and monitoring a two-tier incentive program. For instance:
    1. How will the required technology measures be identified (and updated)?
    2. How will individual customers’ adoption of such measures be known and confirmed?
  20. TOU – Time of Use - Higher Rates in peak and part peak, lower rates in off-peak
    1. PG&E and SCE have 6-hour summer on-peak. SDG&E has 7-hour summer on-peak. There are no winter on-peak periods
    2. Customers over 200 kW have TOU rates, 100 kW for SDG&E. There are optional TOU rates for most customers
    3. SCE and PG&E have interruptible rates for large customers and A/C cycling; SCE has agricultural pump cycling PG&E’s AC cycling is new
  21. Seasonal Rate – In California, summer demand is higher than winter, so rates are higher. All California utilities have seasonal rates. SDG&E is changing its summer season to May-October. SCE’s summer is June-Sept. PG&E’s summer is May-October
  22. VPP – Variable Peak Pricing - Options to buy electricity at a fixed price. A form of a TOU pricing that allows customers to purchase their generation supply from at prices set on a daily basis. Standard on-peak and off-peak time-of-use rates are in effect throughout the month. Under the VPP program, the on-peak price for each weekday will be available the previous day (typically late afternoon) on the utility’s web site. The customers is billed for actual consumption during the billing cycle at these prices.

Policy and Economic Issues in Dynamic Electricity Pricing - Severin Borenstein Professor UC Berkeley Haas School of Business Director UC Energy Institute April 11, 2007

Advances in metering, sensors, and automated response continue to lower the costs and raise the potential benefits of dynamic retail electricity pricing. Political opposition, however, has slowed the transition to these more efficient pricing policies. This webinar analyzes the potential benefits from dynamic pricing and the concerns about wealth transfers and risk to customers and utilities.

3. Business Case
  • Ask people to describe the smart grid’s two biggest benefits and they will typically answer “demand response” and “energy efficiency.” Trouble is, both of them depend on dynamic pricing for maximum impact. People really start changing behavior when prices give them incentives and penalties.

    But here’s the problem -- very few jurisdictions have implemented dynamic pricing for residential customers. Even though there’s lots of objective data about the benefits, most PUCs are afraid to approve dynamic pricing due to potential consumer backlash. Not that it matters, since most utilities don’t ask for it.

  • A Smart Grid is a key enabler in communicating peak prices to consumers; with the goal of peak reduction. Tariffs should reflect the cost of service at different times of day and create the incentives to respond. For example:
    1. Off-peak (9pm-10am) 3 cents
    2. Intermediate(10am -12pm and 7pm – 9pm) 6 cents
    3. On-peak (12pm – 7pm) 13 cents
    4. Critical (5 hrs/day max 120 hrs/yr max) 60 cents

  • Ahmad Faruqui (principal of The Brattle Group)is an economist and leading expert on dynamic pricing. At a recent conference, he outlined these dynamic pricing myths - and truths:
    • Myth 1: Residential consumers don’t reduce peak demand in response to dynamic pricing? As proven in over 70 pilots, the reduction ranges up to 58% and averages about 20%.

    • Myth 2: Customer response does not persist over time? Since 1990, a half million customers at two Arizona utilities (Salt River Project and Arizona Public Service) have been on time-of-use prices, taking action to reduce their peak load, etc. Other programs have shown persistent response to critical peak prices and rebates for heat waves lasting two or three consecutive days.

    • Myth 3: Dynamic pricing hurts low income customers? Over 90% of low income customers saved money in the various pilots. For PowerCentsDC, where low income customers participated only in the critical peak rebate option, 100% of these customers saved money.

    • Myth 4: Customers don’t understand dynamic pricing? Historically many examples of popular dynamically priced services abound — from long distance phone call charges (remember that?), to cell phones, air fares, hotel rooms, and more. Dynamic pricing is even in parking meters, which often specify a daytime price and free nighttime use.

    • Myth 5: Customers don’t want dynamic pricing? Surveys of customers who have no experience with dynamic electricity pricing show that 40-80% report that they do want this option. Similarly, in pilot and ongoing dynamic pricing programs, typically 80% of participating consumers report that they like dynamic prices — and about 90% would recommend it to family and friends.

    • Myth 6: Customers have never encountered Dynamic Pricing ? DP is common in everyday life: the plain old parking meter and daytime parking in large cities, tolls on major bridges, sporting events, airline seats, hotel rooms, rental cars and cell phones.

    • Myth 7: Customers don’t want Dynamic Pricing? ;When customers are asked if they want DP, the majority say no since they only think of high prices and volatile prices. However, when they have lived through it, either in fullscale programs or in pilot settings, the vast majority say yes. There have been over 100 dynamic pricing pilot programs in the US. In follow-up surveys, 80% of the customers prefer the new prices to their old rates.

    • Myth 8: Dynamic Pricing does not work in restructured markets? It has been tested and offered in a variety of markets. The most recent examples come from Connecticut, the
      District of Columbia, Illinois and Maryland.

    • Myth 9: Dynamic Pricing pilots are invalid because of selection bias? In the best pilots, treatments groups and control groups were picked randomly to be representative of the population at large. Pre-treatment measurements were taken to net out any preexisting differences between the treatment and control groups. Analysis of three recent pilots shows that the impacts are not affected when the control group is removed from the estimation of impact.

    • Myth 10: It is much better to pursue direct load control? Direct load control (DLC) only applies to customers who have air conditioning or water heating; other end-uses in the home are not incentivized to respond during critical events. Payments are made whether or not events are called and without smart meters, it is hard to verify that the controlled load has actually responded. Traditionally, direct load control is only triggered by reliability events. In general, Dynamic Pricing can yield higher load responsiveness when combined with enabling technology than DLC and it can be triggered by either economic or reliability event.

The Clash of the Dynamic Pricing Titans: Faruqui v Toney - Part 1 from Judith Schwartz on Vimeo.
A spirited debate on the pros, cons, and common ground for Smart Meter, Smart Grid and dynamic pricing deployment. Featuring Dr. Ahmad Faruqui of The Brattle Group and Dr. Mark Toney of TURN. The discussion is moderated by Judith Schwartz of To the Point.

The event was sponsored by the Kellogg Alumni Club. Recorded in San Francisco 2.17.2011

4. Benefits
  • Save Consumers Money - We are all paying an insurance premium to make energy available in the peak. Dynamic pricing also provides customers with a chance to lower their energy bills by curtailing peak period usage and/or shifting it to off-peak periods. They can also help to lower prices in wholesale markets and to mitigate market power being exercised by a few generators.

    Wholesale electricity prices vary as often as every hour. However, these prices are up to 15% lower than the energy component of retail prices, according to research by Dr. Bernie Neenan, an economist with the Electric Power Research Institute.  This is because retail prices include a premium to cover the retailer’s cost of hedging the wholesale price risk.
  • Improves Reliability by reducing peak demand
  • Increases Equity - Provides a more equitable pricing by reducing costs to customers with lower-than-average peak usage who are currently subsidizing customers with higher-than- average peak usage. Communicates actual system costs more clearly. In the current rate structure, consumers in an area that may require an investment receive no signal in their retail rates that their growing electric use is leading to a significant cost that will be borne by all ratepayers in the franchise area.
  • Encourages energy efficiency and conservation
  • Reduces Capital Requirements – By reduces use on peak, dynamic pricing offsets the need for expensive peaking capacity. If regulators recognize the need for some grid investment long before they are actually asked to permit a transmission line, they can design rates that send a signal to consumers. For example, they can authorize the utility to offer credits to customers who take certain actions to delay the need for the line.
  • Help Cut Greenhouse Gas Emissions. In California, when wholesale energy prices are high, the most inefficient and polluting power plants are operating. Dynamic pricing can discourage consumers from using power at peak times, and thus utilities won’t have to fire up those less efficient power plants. Also, if the state’s wind turbines are spinning at full speed, a customer on dynamic pricing could see low prices, letting them know that it’s a good time to run their equipment.
  • Leverages Smart Meters - Dynamic pricing will enable consumers to get significant value from their new meters. PG&E needs to put in place dynamic pricing rates now because PG&E is rolling out new Smart Meters to all of its customers. PG&E expects to finish deployment of its Smart Meters by 2012.
  • Benefits from Future Enabling Technology - Over the long run, customers may have access to more enabling technology allowing them to respond more easily to PTR rates and increase their resulting demand response. For these reasons, the CPUC concluded that the demand elasticity for the SCE PTR settlement agreement business case could be based on elasticity calculated from CPP rates and are assumed to remain stable over time, and are reasonable for the purposes of estimating future energy savings from PTR rates and their associated benefits.

5. Risks/Issues
  • Legal Constraints - Some customers need to be protected from free market. New York law prohibits mandatory time-of-use rates. Enacted during California utility crisis of 2000-01, AB 1X prohibited residential customers to be placed on a mandatory rate schedule or overlay that can result in higher bills for Tier 1 and Tier 2 usage. The limitations created by AB 1X meant that dynamic pricing programs that could potentially increase customer bills (e.g., CPP) may only be offered to residential customers on a voluntary basis.

    In October 2009, Governor Schwarzenegger signed bill, SB695, allows rates to rise again in those first two tiers, to a limited degree. Bills can rise by the same amount as the rate of inflation - as tracked by the consumer price index - plus 1 percent. The total increase can not exceed 5 percent per year.

    The same bill also allows a limited return to a policy called direct access, which let power customers buy from companies other than the utilities. Direct access was part of California's disastrous experiment with electricity deregulation in the 1990s, but the state suspended it in the wake of the electricity crisis. Under SB695, the state will now allow direct access to grow again, but only to the level it reached before the crisis, as measured by the total amount of electricity sold under direct access contracts. Importantly, the Act does not eliminate the existing prohibition on Direct Access; it merely directs the California Public Utilities Commission to consider and develop limited Direct Access rules in the coming months.

  • Winners and Losers - Some customers may have concerns about dynamic pricing increasing their rates. Dynamic Pricing has become a political football. Low cost electricity any time the consumer wants to use it can be seen as an entitlement. Using ratemaking and retail incentives to address system needs appears to some as undue price discrimination, and is thus a controversial topic in some parts of the country.

  • Unfair Impact on Low Income Consumers - Consumer groups argue that dynamic pricing  will disproportionately affect the unemployed, the poor, and the elderly, who may be less able to reorder their energy usage or purchase expensive smart appliances that could facilitate more use of off-peak power.  Electricity is an essential service. Heating and/or cooling in different climates are essential to life. If the cost of electricity at peak times is too much for some consumers to pay, is it better that:
    (a) All consumers pay less for electricity at peak times; or
    (b) The price of electricity is set based on actual costs , and social / hardship policies are in place to help those who are vulnerable in society to pay for their electricity

  • Consumer Cynicism - Basically, utility consumers don't trust the utilities. When rates change, they assume that the utilities are trying to gouge them. The gist of a cynical view is, "We'll use your taxes to pay to install expensive meters that utilities cannot cost-justify, and these meters have the sole value of enabling TOU readings.

    "Then our lobbyists will lean on rate-setting bodies to raise your rates. Then you consumers will pay for it all, first with your taxes, then with higher electric bills ever afterwards."

    "Finally, we vendors will try to sell you gizmos that enable you to turn off the juice when prices are highest, to soften the impact."

  • Electricity Seen as a Right - Many factions who traditionally claim to staunchly support the value of free market forces seem to be very vocal that market pricing of electricity via TOU rates is some sort of government/utility conspiracy to deprive people of their inalienable right to electricity and the pursuit of happiness.

  • Transparency - Customers are not really aware that the price they pay for electricity today includes a significant risk premium for insuring them against wholesale price volatility. Effectively, policy-makers have made this choice for them. What the policy-makers have failed to communicate to customers is that the average price of electricity will go down if dynamic pricing is introduced.
  • Lack of Feedback - Today consumers have very little information about their energy use

  • Cost/Benefit Analysis - How will the costs and benefits of dynamic pricing be evaluated? Are the tests that have long been used to evaluate other demand side programs sufficient or should they be modified by including the concept of consumer surplus in the net benefits equation?

  • Customer Participation - Not all customers aware of PTR events are likely to reduce load in response to a program event. SCE argues that the figure is 50%, while TURN counters it is more likely to be 25% TURN calls into question the applicability of participation rates from the State Pilot Program (SPP) because the SPP population differs from the general population of the state in that they have already shown a willingness to voluntarily participate in demand response programs, and are therefore more likely to participate than typical customers.

  • PTR Incentives Unproven - Current evidence does not provide a definite picture of customer behavior under a PTR rate, since such rates are not currently in widespread use.
6. Case Studies
  1. Victoria, Australia - The state of Victoria has a mandatory Smart Meter rollout plan and it is on its way to over 3 million meters. In March, 2010, the government placed a moratorium on TOU.

    In Australia, critical peak is due to air conditioners. Peak demand is around noon. Consumer advocacy groups raised hell about pensioners, disabled, infirm, etc. Those who cannot reduce power consumption at that time. They account for 15% of the consumer population. The lesson?
    Utilities are charged with implementing energy policy. Social policy is someone else's role, but if left unresolved substantial criticism, bad press and backlash will be the result.

    In 2004, the Essential Services Commission of Victoria, Australia (ESC) mandated interval meters for 2.6 million Victorian electricity customers. The rollout commenced in mid 2009 and is forecast to be completed by the end of 2013. In 2009 the Victorian Auditor General undertook a review of the program and found that there were "significant inadequacies" in advice to Government and that project governance "has not been appropriate". In May 2010 it was reported that the program was expected to cost $500 million more than originally estimated with a total cost of $1.6 billion

    In March 2010, the Victorian Energy Minister Peter Batchelor announced that there will be a moratorium on the introduction of Time of Use tariffs because of concerns pensioners and the poor would be hardest hit by higher electricity prices. Mr Batchelor made the announcement, an election-year embarrassment for the government, after meeting representatives of the poor, including St Vincent de Paul and the Victorian Council of Social Service (VCSS). Consequently meters installed in Victoria have limited smart functionality with neither interval data nor the Home Area Network being available for households making realising consumer benefits uncertain.

    Charity groups estimate the meters, dubbed "dumb meters" by the state opposition could increase a household's annual electricity bill by more than $250 a year. Victorian Auditor-General Des Pearson savaged the scheme in a report to Parliament late in 2009, saying "There has been insufficient analysis to fully understand potential perverse outcomes, risks and unintended consequences for consumers," VCOSS chief executive Cath Smith said Mr Batchelor had recognised that people who spend a lot of time at home during the day or who could not shift their energy use to off-peak times could suffer. Ms Smith said the elderly, long-term unemployed and people with disabilities might be hit hardest by the new pricing plan. "It's imperative the impacts of time-of-use pricing are investigated and measures are put in place to ensure low-income and disadvantaged households are not worse off," she said.

    In November 2010 the Victorian Labor Party was voted out of State Government. The incoming Coalition Party stated that the program would be reviewed and the Auditor General's recommendations implemented specifically commenting on program governance, customer data protection and cost recovery. In January 2011 the Energy Minister Michael O'Brien said he was not ruling out a suspension of the program.

  2. California Dynamic Pricing Plan - To efficiently manage the impacts of heightened demand for electricity, the California Public Utilities Commission (CPUC) has mandated that all Investor Owned Utilities pursue Time Varying Pricing as a way to support the state's energy and greenhouse gas reduction requirements. This mandate transitions all business customers in the state from flat pricing plans to time varying pricing plans that align customers' price of energy with the cost of energy at the time it is used.

    In February 2010, The California Public Utilities Commission (CPUC) adopted new rate structures for commercial, industrial, and agricultural customers of PG&E as part of an effort to implement dynamic electricity prices for all California consumers. These rates are designed to reflect the cost of electricity production during periods of high demand. When combined with PG&E's Smart Meters, these rates will provide an opportunity for customers to lower their bills while improving system reliability and reducing greenhouse gas emissions. Click here for the complete proposal.

    Beginning November 1, 2011, many commercial and industrial customers will begin moving to new Peak Day Pricing rates. Customers on these rates will pay different prices for electricity depending on the time of day. On the few hottest days of the year, prices for electricity used between 2 p.m. and 6 p.m. will increase further. However, PG&E will notify customers about these peak days one day in advance, so customers can plan accordingly. All customers who participate in the Peak Day Pricing program will have options to reduce the uncertainty that these rates may cause. For example, customers will have an option that protects them for the first year they are on the new rate if their electricity costs for the year are higher because they are on the Peak Day Pricing rate versus when they were on their old rate structure. Customers can also opt out of the Peak Day Pricing rate anytime within the first year of participation if they feel the rate is not working for them. Customers that choose to stay on the rate can also use conservation efforts or move their usage to other times to limit their exposure to these peak time rates.
    • There will be between nine and 15 Peak Day Pricing event days per calendar year.
    • All customers that are defaulted to, or choose, Peak Day Pricing rates will be afforded bill stabilization for the first year, unless they choose to waive such protection. All customers subject to Peak Day Pricing will have a hedging option to reduce bill volatility.
    • Customers who are on Peak Day Pricing rates may opt out any time during the first year they are on such rates.

    PG&E PDP Transition Schedule
  3. California Opposition to Peak Day Pricing - In February 2011 The Division of Ratepayer Advocates (DRA), an independent consumer advocacy division of the California Public Utilities Commission (CPUC), and the California Small Business Association (CSBA), a non-profit small business advocacy group, requested that the CPUC revisit its decision to direct PG&E to place 500,000 small business customers on a dynamic pricing program beginning in November 2011. They claimed program will likely lead to disruption and higher costs to small businesses.

    They noted that more than 90 percent of PG&E’s small business customers currently pay a flat electric rate, and the vast majority of small business customers have had no experience with time-varying electric rates. Yet, the dynamic pricing program is extremely complex for customers to understand and prevents small businesses from being able to plan for the cost of electricity. DRA and CSBA favor rate design programs where electricity prices are predictable and easy to understand.

    Regarding why her organization is petitioning the CPUC, Betty Jo Toccoli, President of CSBA, said, “California lost 1.4 million jobs over the last four years and the state’s unemployment rate is over 12 percent. With dynamic pricing, small businesses will send workers home, tell workers not to come into work or pay large electric bills for using power on peak days. Small business is the engine of our economy. We need policies that will promote job retention and job growth by small businesses, promote economic recovery, and help small businesses use electricity efficiently every day, not just on peak days.”

    Despite an intensive utility education campaign, 62 percent of large business customers have opted out of dynamic pricing in favor of a simpler time-of-use (TOU) pricing largely based on businesses’ own experience with time-varying rates. PG&E has reported many difficulties in communicating the features of dynamic pricing to even its largest business customers, many of which have dedicated energy experts on staff. Additionally, one of the assumptions underlying mandatory dynamic pricing was that there would be a variety of new products, services, and programs that would enable small business owners to reduce their usage during peak periods. This has yet to happen.

    The joint petition filed by DRA and CSBA asks the CPUC to consider a gradual transition to the more customer-friendly time-of-use pricing for small businesses, rather than implement dynamic pricing on a fixed timetable beginning in November 2011. Customers should not be transitioned until certain readiness conditions are met, including customer understanding of the rate structure, a reasonable level of voluntary participation, and a low level of customer complaints. Furthermore, the availability of reasonably-priced supporting technologies such as “smart appliances” could provide customers the ability to change their electricity use in order to take advantage of or not be harmed by rates that vary by time.

    Current evidence does not provide a definite picture of customer behavior under a PTR rate, since such rates are not currently in widespread use. TURN argues that a priori one would expect customers to consume less under a CPP rate than under a PTR rate because the consequence of peak consumption under CPP rates is likely to be more attention getting for the customer, and that expensive consumption will run into the customer’s budget constraint. On the other hand, the customer under PTR rates faces no adverse consequence from continuing to consume, and that extra consumption at the lower OAT does not impact budget constraint.

    Under a CPP rate, the charge on each kWh consumed during the peak period on an event day is the OAT plus the CPP adder of 60¢/kWh. So if the OAT is 16¢, a customer would be charged 76¢ for each kWh consumed during the peak event (a “stick,” accompanied by a “carrot” of tariff reductions on other kWh consumed). Under a PTR rate, the customer is charged the OAT on each kWh consumed during the event peak period (e.g., 16¢), but receives a credit of 60¢/kWh for each kWh saved compared to a reference level. TURN states that while the marginal incentive to save a kWh is the same between the CPP and PTR rates, the marginal price to consume a kWh is far higher under the CPP rate (76¢) versus the PTR rate (16¢).

    TURN also argues that quantitative evidence supports the theory that a combination of a lack of a penalty for increased use combined with a low absolute level of savings available under a PTR rate would over time discourage customers from reducing usage under a PTR rate. SCE counters that TURN's position has no empirical basis, and provides analyses that the demand elasticity computed for CPP under the SPP are "statistically indistinguishable" from the elasticity of PTR pilots conducted elsewhere.

  4. PowerCentsDC - was an advanced or "smart" meter pilot program for approximately 800 to 900 residential customers. The program began in mid-July 2008, and ended in October 2009. It was sponsored by Smart Meter Pilot Program, Inc., a non-profit organization comprised of the Consumer Utility Board, the District of Columbia Office of the People's Counsel, the District of Columbia Public Service Commission, the International Brotherhood of Electrical Workers and Pepco.

    PowerCentsDC ended in October 2009 after operating for two summers and one winter. It gathered sufficient information regarding customer response to residential smart pricing to serve as a guide to future program design. SMPPI documented the results in the final report and shared their findings with District and national policymakers who are exploring long-term policy options involving smart metering.

    • Consistent with other pilots, PowerCentsDC showed more consumers reduced summer usage in response to dynamic prices, energy information and automatic control.
    • CPP prices led to the greatest reduction in peak demand
    • CPR prices were the most popular
    • Customers with limited-income signed up at a greater rate than others, reduced peak demand very slightly less than others, and saved money on the program.
    • Summer peak reductions were greater than winter implying greater discretionary load
    •  Automated response via smart thermostats increased the reduction
    • The vast majority of participants saved money even though the program was designed to be revenue neutral.
    • Over 93% of participants who expressed a preference preferred PowerCentsDC to over Pepco's standard offer service.
7. Success Factors To avoid the consumer backlash that has made headlines for two years, utilities must proactively educate their customer base on how dynamic pricing can be managed to control energy bills, provide tools such as web portals with customer energy use feedback and maintain trust and transparency as core values,
  • Offer flexibility and options - Under dynamic pricing, customers would face higher prices during a small number of hours during the year but lower prices during other times. Applicants should consider offering “price protection” products that allow customers to pre-purchase set quantities of electricity at fixed prices. These products substantially reduce bill volatility without distorting the price signal from dynamic pricing.

  • Offer an online comparison tool - For example, here’s one from the Ontario Energy Board. It helps Ontario consumers understand how their energy costs might change if they switched from standard to time-of-use pricing.

  • Marketing - Market smart pricing to attract those customers who stand to gain the most from it and who would also give me the most benefits. It would not be a good situation if the only customers who joined the program are the ones who would get lower bills simply by switching over to dynamic pricing rates and not making any reductions in their peak loads. This has to involve utilities learning a whole new way to talk to – and listen to –their customers.

  • Value for Consumers - While we are interested in getting customers to reduce energy use during the few peak price times, it is only worthwhile to the customer if their peak time costs are more than offset by low electricity prices at many other times. If you let basic laws of supply and demand in the electric markets work then this will be the case. However, utility rate-making often finds ways to nickel and dime customers to the point where they end up on a rate that charges high prices but not low ones. But this isn’t inevitable. Consumer advocates and regulatory agencies need to work with utilities to develop new dynamic pricing options that provide real value to consumers, not just price shocks.

  • Smooth Transition - Minimize “sticker” shock in the transition from one rate design to another. To minimize distributional concerns and to facilitate the transition to dynamic pricing it is important that customers facing dynamic pricing not subsidize customers facing traditional price schedules. In particular, price schedules for non-dynamic pricing should continue to reflect the average cost per kilowatt-hour of serving that group, which is likely to be higher than for customers on dynamic pricing.
    • Bill Protection (“shadow billing”) is a way to phase in dynamic pricing. This means that consumers are placed on the new prices, but guaranteed not to have a higher bill for the first year. For example, PG&E has a bill protection option that prevents participants in CPP from paying more than they would have under their previous rate during their first year of CPP participation. Participants may also opt for technical assistance to help them better take advantage of the program.

  • Education - There will be short periods when energy prices will be high and customers have higher bills, but there will be many more times when consumers will save money because of they have access to lower prices. Giving customers smart meters and new rates will change their monthly bills. If introduced correctly and paired with the right high-quality education and information tools, customers will make the adjustment. If done wrong, customers won’t understand the changes and will be angry about having to pay for new technologies that they don’t see benefiting them. Regulators and others will have to be diligent that the introduction of smart meters and new rates is well managed and that any transitional hiccups are not overblown.

  • Simplicity - Be simple and easy to understand. The rate has to be friendly. Traditionally, utilities are not very good at marketing new services to customers. Just compare your utility bill or other information that you receive from them to what you get from a more dynamic one like the cellular industry. “Friends and Family” and “Nights and Weekends” phone plans are a lot easier to understand than a long complicated tariff sheet that includes references to critical peak periods, demand charges and lots of terms, conditions and disclaimers. Utilities tend to think that these types of rate sheets are what they should provide to customers, but they tend to be nearly impossible for customers to understand and riddled with terms that sound intimidating or just plain scary. We don’t need to hide the details, but we need to articulate what we are doing in ways that people can understand. Again, this sort of confusion isn’t inevitable, but we need to build a new type of relationship between utilities and consumers.

  • Equity - Meet the needs of people with fixed incomes and severe medical conditions. Equitably allocate costs across customer classes.

  • Enabling Technology - CPP and PTR usually require notification a day in advance of the DR event occurrence. Enabling technology such as Auto-DR can facilitate end-use load response within a much shorter timeframe. Therefore, pricing options coupled with enabling technology can respond to DR events with an hour notification.

8. Next Steps
  • The Smart Grid Investment Grant Program suggests conducting randomized control trials involving smart meters and dynamic pricing. In the ideal trial, smart meters would first be installed for all customers within a particular geographic area. This might be any well-defined part of the applicant’s service area or, alternatively, a set of zip codes. Selection of this area would be at the discretion of the applicant and could be based on where it would be easiest to install smart meters. Next, customers within this geographic area would be randomly assigned start dates for dynamic pricing. There would probably need to be a significant period of time between start dates. For example, a randomly-selected sample of 50% of all customers might begin dynamic pricing on March 1, 2010, while the other 50% begins on March 1, 2012. The DOE is most interested in applications in which some customers would remain on default tariffs for at least two years. The randomization would need to take place at the customer level so all customers within the geographic area are equally likely to be in each group.

9. Links
  1. LBL - TAP - Tariff Analysis Project -A comprehensive data warehouse of electric tariffs combined with a variety of query and analytical tools. T.A.P. contains a growing library of hundreds of tariffs, from over a hundred utilities, for residential, commercial-industrial, agricultural and public sector customers. A generic data model has been developed to concisely represent all varieties of tariff structures, capturing seasonal charges, time-of-use rates, and complex block structures.
  2. PG&E - Smart Grid Rate Case with PTR Plans
  3. SCE Smart Grid Rate Case -Overview -PTR Plans
  4. The Brattle Group - From Smart Metering to Smart Pricing - Smart meters, such as those being implemented by a number of utilities in Canada, Italy and the United States under the rubric of advanced metering infrastructure (AMI), provide many operational benefits to the utility such as lower meter reading costs, theft detection, faster outage detection and remote customer connect/disconnect.
  5. The Brattle Group - The Power of Experimentation - New evidence on residential demand response. - This paper reviews evidence from the fourteen most recent pricing experiments with dynamic pricing. It finds that, on average, customers respond to higher prices by lowering usage. The magnitude of price response depends on several factors, such as the magnitude of the price increase, the presence of central air conditioning and the availability of enabling technologies such as two-way communicating thermostats and gateway systems. For the average customer, time-of-use rates are likely to induce a drop in peak usage of under 5% while critical peak pricing tariffs a drop of around 10-25%. Customers with central air conditioning are likely to display responses in the 15-20% range while those with enabling technologies in the 25-45% range.

  6. Dynamic Pricing in a Smart Grid World NARUC Webinar January 26, 2010 Chuck Goldman, Project Manager Electricity Markets and Policy Group Lawrence Berkeley National Laboratory; Theresa Flaim, Energy Resource Economics, LLC; Roger Levy, Levy Associates

  7. 2010 Load Impact Evaluation of Pacific Gas and Electric Company's Time-Based Pricing Tariffs FSC Group,  March 31, 2011  This report contains ex post and ex ante load impact estimates for PG&E’s residential time-based pricing tariffs.  PG&E has three time-varying rates for residential customers. SmartRate is a dynamic tariff that has high peak period prices on up to 15 event days each year. It is an overlay on top of PG&E’s otherwise applicable tariff, which is a four tier, increasing block rate. Under SmartRate, prices vary only on event days.    Roughly 25,000 residential customers are on the tariff.  The average load reduction during the peak period in 2010 across 13 event days was 14.1%. This evaluation examines several important policy issues, including whether load impacts differ when customers are under first year bill protection than after bill protection expires, whether impacts differ for customers on a balanced payment plan and whether structural winners respond differently than structural losers. The report also assesses whether impacts stay the same, grow or diminish for customers that are on the tariff for multiple years. The effect of customer characteristics, such as air conditioning ownership and income, are also examined,

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