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The Barriers to Real-Time Pricing: Separating Fact From Fiction

Real-time pricing has been hindered by the misperception that a shift to RTP will create new types of risks, without creating benefits for utilities or customers.
Fortnightly Magazine - July 15 2002

has purchased power under long-term contracts, thereby seemingly eliminating the need for RTP. There appears to be no hourly variation in power prices under these contracts, but there is variation by pricing period. For example, blocks of peak power are much more expensive than blocks of off-peak power. Some have argued that RTP is now irrelevant in California because there is no hourly price variation in the wholesale price of power.

The argument that RTP does not apply in this situation has two weaknesses. First, it ignores the fact that the existence of long-term contracts has not eliminated the wholesale spot market for power. According to some sources, during peak periods, as much as 30 to 40 percent of the power may be traded in this market. During such times, RTP at the retail level would provide customers with the appropriate signal to conserve power usage. This would benefit the state, and, if customers can reduce peak load, it would also benefit the participating customers.

Second, it overlooks the fact that during times when the state has surplus power at long-term contracts, it is forced to dump this power on the wholesale market at below-cost prices. If customers were on RTP, they could be offered this power at the state's cost, which would be lower than the customer's average price. This lower price may stimulate growth in customer usage during off-peak hours, especially if the customers have been trained in how to increase power usage by rescheduling operations. It would lead to even greater usage if customers have enabling technologies on their premises. Customers and taxpayers would be better off, and so would the state.

Technological Barriers: The Cost of IT

Many technological barriers also impede the introduction and diffusion of RTP. The barriers are not intrinsically technological because the required technologies exist in today's marketplace. However, the market penetration of these technologies has been very limited due to their high capital costs. This in turn is due at least in part to their limited market penetration and to the barriers discussed in the previous sections. Technological barriers include the:

  • lack of hourly metering equipment,
  • lack of digital communication equipment to transmit hourly prices in real-time to customers,
  • limited penetration of sophisticated energy management and control systems,
  • even more limited penetration of time-flexible energy-using equipment that allows the energy to be stored during off-peak periods and released during on-peak periods, and
  • small penetration of distribution energy resource systems.

An independent study of four industrial firms finds that self-generation significantly enhances customer responsiveness to RTP. 7 Duke Power's experience suggests that customer response increases over time. Customer elasticities grew from .20 in 1995 to .25 in 1999. 8 These findings illustrate the role of enabling technologies and provide some preliminary evidence on whether customer responses increase over time. They raise an important research issue: As customers learn how to take advantage of RTP and invest in new enabling technologies, do they display increasing responses, suggesting that long-run elasticities of substitution would be higher than short-run elasticities?

Of course, both utilities and state and