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Real-Time Pricing: Ready for the Meter? An Empirical Study of Customer Response

Fortnightly Magazine - November 1 1998

times a year. Pareto defines a "system emergency" as (1) the unexpected loss of one or more generation facilities during a critical period, leading to system generation reserves falling below desired levels, or (2) the unexpected loss of one or more major transmission facilities, which affects Pareto's ability to deliver energy.

Nevertheless, we believe our assumption of a perfectly elastic supply curve for electricity remains valid.

Here is one way of confirming that assumption. Large utilities have about 30,000 MW of generating capacity available. For the price of electricity supplied to increase by at least 50 cents per kWh, either one or both of the following events must occur: (a) A drop of 10 percent (3,000 MW) or more in generating capacity or generating reserves, or (b) an increase of 10 percent or more in demand.

To put these numbers in perspective, consider that a large industrial customers will demand about 3,000-4,000 kW per hour. Hence, for prices to increase sharply because of a change in customer demand, at least 1,000 customers have to change their demand by at least 1,000 kW (one megawatt) simultaneously. According to utility sources, this never happens.

Nainish K. Gupta, Ph.D., is adjunct scholar at James C. Bonbright Public Utilities Center at the University of Georgia's Terry College of Business. He is an energy consultant and has worked with the Georgia Public Service Commission and El Paso Energy Marketing. Albert L. Danielsen, Ph.D., is director emeritus at the Bonbright Center. He's an energy consultant and was one of the editors of Principles of Public Utility Rates, 2d Ed. (Public Utilities Reports Inc.), the 1988 update of the classic text by James C. Bonbright.

In a Nutshell

Customer response should prove greatest under two-part plans, where only a portion of usage is priced in real time.

TRACKING COSTS. Real-time pricing programs track marginal costs closely over short intervals, such as 6 minutes, 15 minutes, or an hour. Some RTP programs require additional monthly charges unrelated to usage to cover customer and capacity costs, whereas others are designed to recover capacity costs directly by applying adders or multipliers to the real time prices based on marginal costs.

• NOTICE TO CUSTOMERS. Under RTP, the utility commits to a certain hourly price with a modest advance notice to the customer, such as day-ahead or hour-ahead notice. While the utility would like to minimize the advance notice to minimize price risk, the customer prefers longer advance notice that allows greater opportunity to transfer demand to off-peak periods.

• ONE-PART PLANS. Real-time prices apply to all usage. Hourly prices consist of marginal energy cost and transmission losses plus marginal generation and transmission capacity costs during certain peak-load hours. A transaction charge, also reflected in the hourly price, ensures revenue neutrality.

• TWO-PART PLANS. Real-time prices apply only to incremental usage above a baseline load level. The baseline component applies an appropriate firm non-RTP tariff and Fuel Cost Recovery charge to the Customer Baseline Load for each month of the year. The CBL is negotiated by the customer and the utility and provides the basis from