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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

successful program design. Examples from other industries indicate that customers do respond to the opportunity to lower costs by shifting their usage patterns (airlines) or by taking on time-varying products (adjustable rate mortgages).

Utility customers are attracted to RTP on the premise that it will save them money. However, when prices spiked in various markets during the past few summers, many customers dropped out. For example, Duke Energy had 100 customers on its RTP program, but now it has only 59. BC Hydro had 25 customers; now it has none. Researchers need to study and analyze the following inter-related set of issues:

  • If customers were offered RTP on a voluntary basis, how many would take it?
  • Are customers more likely to take a two-part design than a one-part design because it provides a measure of price insurance?
  • What types of customers are drawn to RTP?
  • At what rate are customers willing to trade off a lower expected value of price against a higher standard deviation of price?
  • How many more customers would take RTP if it were to be combined with some type of price protection product, such as a price cap or a price collar?
  • What is the demand for other types of market-based pricing roducts, such as occasional RTP?

Another issue that needs to be tackled by researchers is the amount of load clipping or shifting that would be induced by RTP. Experience has shown that only a few customers either reduce load or shift it from on-peak to off-peak periods. And of those that do respond to RTP, there is considerable day-to-day variation in response patterns.

Customers may not sign up for RTP because they do not know how to lower costs by reducing usage during high-cost hours and increasing usage during low-cost hours. Or they may lack the capability to shift load. This contention, often advanced by skeptics, has been negated by research conducted over a number of years and over several geographical regions. This research finds that customers do shift load, but the magnitude of shifting varies across business types.

The Electric Power Research Institute's (EPRI) StatsBank contains the measured responses of about 1,000 customers in the United States and the United Kingdom. Each of these customers has been on some form of a time-differentiated or RTP for several years, while others have been on some type of curtailable or interruptible rate. EPRI has estimated the between hours. 2 Across all business segments, the estimated hour-to-hour elasticity of substitution within a day ranges from zero for some segments to values in excess of .30 for other segments.

Within the manufacturing sector, the highest elasticities are observed for electrically intensive customers. These include firms in the pulp and paper and primary metals industries. These customers have an average elasticity of .09. The lowest elasticities are observed for non-electrically intensive customers, such as firms in furniture manufacturing, printing, and publishing. These firms have an average elasticity of .04. The elasticities rise significantly if the customers have on-site generation. For example, the elasticity for electrically intensive customers with on-site generation

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