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AS U.S. ELECTRICITY MARKETS BECOME increasingly competitive, large industrial customers will discover many new choices. These choices include the opportunity to modify the amount and timing of electricity use in response to prices that vary from hour to hour. In addition, customers can sell certain electricity services, including operating reserves and load following, to the system operator. And industrial customers with cogeneration facilities can participate fully in bulk power markets, buying and selling energy and ancillary services in response to changes in spot prices.

The choices will mean real dollars. Using detailed data on one industrial plant's electricity use, cogeneration output and purchases from its local utility, we quantified the benefits of the options listed above. We have concluded that real-time electricity prices will greatly expand the options that industrial customers have for managing their electricity bills.

Of course, large industrial customers have always had some choice in managing electricity costs. Such customers can purchase, under current cost-of-service tariffs, either firm or nonfirm power. If they buy nonfirm power, their rate is lower, typically with a much lower capacity charge. In return for this lower rate, the utility has the right to interrupt the flow of power to the customer. In addition, many utilities offer their large customers time-of-day prices. These prices change on a fixed schedule from hour to hour, but do not depend on current system conditions and costs.

But nonfirm and time-of-day prices are crude simplifications of what is possible with real-time pricing. With real-time pricing, the customer can make time-of-use decisions concerning the amount of electricity to consume (Schweppe et al. 1998). For example, if the price is high but the customer faces tight production deadlines, it might decide to pay the higher price and consume electricity as it otherwise would have. In many cases, customers may invest in equipment that allows them to shift production, and therefore electricity consumption, from one time to another. Real-time pricing allows customers to respond - as they choose - to actual, not expected, power-system conditions.

New technologies may enhance the ability of customers to conveniently, even automatically, adjust their loads to changing electricity prices. For example, The Southern Co. and Honeywell developed software that allows facilities on real-time pricing to automatically change electricity use in response to hourly price signals (Energy 1997).

In response to FERC's Order 888, industry players throughout the country are developing proposals to create independent system operators. These proposals would create markets for certain ancillary services (Hirst et al. 1996). As proposed in California, (Pacific Gas 1997) customers and suppliers can bid into some of these markets.

Industrial Facility Characteristics

The industrial plant we studied has two primary operations: mining and chemical processing. Together, these operations have a peak electrical demand of more than 90 megawatts. The load factor for this industrial facility is about 84 percent, compared with less than 60 percent for U.S. utility systems in general.

Mining involves large equipment that accounts for about half the electricity demand at this facility. In addition to extracting ore from the earth, the facility also processes the