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Real-Time Pricing: Paying at the Margin
Savings, yes. But some load-management
techniques may imply trade-offs in service
quality.By Scott L. Englander, John E. Flory,
Leslie K. Norford, and Richard D. TaborsAs facility manager for a large hotel, you browse your energy vendor's web site to view tomorrow's hourly prices. But it seems your computer (pc) has already done some browsing of its own. Since it's connected to your energy management system, your pc has already looked up the weather forecast and has logged on to the hotel's main computer to find out what rooms will be used. Using this information, your computer is now churning through several billion operating scenarios to pick the least expensive energy strategy for the following day.
A while later, an incoming e-mail message describes the operating schedules for your facility's mechanical systems. You see that while prices will skyrocket to over $1 per kilowatt-hour (Kwh) for a couple of hours in the afternoon, your pc has planned an operating scenario that will take advantage of bargain basement prices during the early morning hours to shift certain loads, and will run your auxiliary generators when the high prices kick in. A comparison shows you that your total bill for the month will undercut what you would have paid under your previous conventional electricity rate. You leave for the day, knowing that your energy bills will once more come in under budget.
A fantasy? Perhaps, but not far from today's reality. At the core of this scenario lies the concept of "real-time" pricing, or RTP: that electricity can be bought, sold, and traded in a way that takes into account variations in cost related to time and location.1
In today's market, traditional flat or time-of-use (TOU) rates still predominate. They reflect the supplier's marginal costs only in an average sense. As such, they skew consumer behavior and create subsidies within and between customer classes. By contrast, RTP offers a clearer economic signal, motivating customers to adjust patterns of use to match the utility's marginal costs.
During the past few years, electricity providers have begun offering real-time prices, even while heavily regulated. RTP or variable pricing rates are currently available at over one-third of the utilities that serve the 60 largest cities in the United States.2 Initially, such rates were used for load management (especially for local transmission and distribution constraints). More recently, RTP is seen as a tool to attract or retain customers.
In a competitive retail market, RTP will likely become the dominant foundation of electricity market transactions. Wholesale spot prices will in all likelihood serve as the basis for the energy component of retail RTP.
The California Public Utilities Commission (CPUC) envisions retail customers having the option to receive hourly prices that reflect the changing wholesale prices of the Western Power Exchange. The CPUC also envisions retail customers making use of contracts for differences, forward contracts and other risk management instruments similar to those available to wholesale customers.
Thus, RTP will retain a role as the market evolves. The basis of prices will shift from the production costs of the local utility to