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Real-Time Pricing: Paying at the Margin

Fortnightly Magazine - November 1 1996

those of the regional wholesale market. As the CPUC has noted, the opportunities for improving asset utilization and cost control in this capital-intensive industry still remain.3

Attributes: Real Time vs. Time of Use

The details vary widely, but RTP plans share several common factors. Real-time retail electric prices typi-cally do not change frequently in real time, but tend to remain constant for periods that range from a half-hour to five hours (hourly being typical). The customer usually receives energy prices a day ahead, though forecasted prices may be available earlier. Hourly meters record loads, and the utility bills the customer monthly. Consumers receive notice of prices via fax, modem, e-mail, and more recently, the World Wide Web. Hourly prices typically fall below average for much of the time, shooting up to high levels (em perhaps a dollar or more per kilowatt-hour (em only for short periods, which may represent only 1 or 2 percent of all hours each year.

Most current RTP rates are designed so that if the customer does not deviate from "baseline" (i.e., pre-RTP) operation, he or she will see no change in total electricity cost. In other words, from the utility's perspective, the rate stays revenue-neutral if the customer (or class of customers) does not alter consumption patterns. Deviations from the baseline load profile will increase or decrease the bill, depending on the hourly price at the time they occur.

So why don't traditional TOU rates offer enough of a price advantage?

Experience with traditional TOU rates has demonstrated that customers see little incentive to shift or curtail demand at critical times if the swing in prices is too small. Likewise, the customer becomes less able to respond when high prices remain in effect for too many hours during the week. Fixed-demand charges based on the customer's monthly peak provide crude price signals at best; they can severely penalize short-term operation mistakes or equipment failures, whether these occur at critical times or not. Curiously, such demand charges persist in many real-time rates. Further time-differentiation in prices is needed for customers to effectively change their behavior.

Commercial/Industrial Uses: Some Trade-offs

To control mechanical systems in response to price, operators of energy-using facilities can take advantage of RTP to control mechanical systems in response to price. Common price-control techniques fall under several general categories:

s Storage. Shifting energy purchases from high-priced periods. Relying instead, for example, on central thermal storage for cooling, or (for industrial facilities) on storing intermediate product.

s Fuel Switching. Switching between an electric chiller or a chiller driven by a gas-fired engine, for example.

s On-site Generation. Using auxiliary power when (marginal) electricity prices exceed the operating cost of the generator.

Other response strategies may involve a trade-off between cost mitigation and service quality, especially when energy managers must decide which loads are noncritical, or choose among resources that offer different levels of service quality to meet the same need:

s Curtailment. Cutting back on noncritical uses (e.g., lighting) when prices exceed a given threshold.

s Distributed Storage. Precooling a building's thermal mass or frozen product,