The California Public Utilities Commission (CPUC) has directed the state's electric and gas utilities to implement a two-year pilot allowing applicants such as residential real estate developers...
California Experiment: Dynamic Pricing for the Mass Market
Will the state launch a full-scale rollout of dynamic tariffs?
A pilot program in California is putting dynamic pricing and advanced metering to the test.
The California Public Utilities Commission (CPUC) approved a Statewide Pricing Pilot (SPP) in March, 1 at a cost of approximately $10 million, including metering, project planning, management, evaluation, and concurrent market research on non-pilot participants focused on customer preferences for rate options. 2
The SPP has the following objectives:
- Estimate demand curves for electricity consumption by time-of-use for dynamic tariffs, and derive the associated price elasticities of demand;
- Gather information on customer acceptance of dynamic tariffs, control technologies, and information treatments;
- Forecast the impact of a full-scale rollout of dynamic tariffs; and
- Provide input into a cost-benefit analysis of universal deployment of advanced metering infrastructure.
Building on the past quarter century of research on time-differentiated pricing, the SPP breaks new ground in a number of areas. First, it will test time-varying rates against a backdrop of an inverted five-tier rate structure that was created in response to the energy crisis of 2000-01. Second, it will use an integrated sample design across three utility service areas. Third, it will use similar rates across the three utilities.
The SPP includes a traditional time-of-use (TOU) rate and two types of critical peak pricing (CPP) rates that feature a substantially higher peak price (about 50 to 75 cents/kWh) for 15 days of the year. One type of CPP rate, CPP-F, will feature a fixed peak period identical to the one in the TOU rate, and day-ahead customer notification. The other type of CPP rate, CPP-V, will feature a variable-length peak period, which can be called on the day of an "emergency."
The rates are designed to provide a significant price signal to customers, and to generate meaningful savings on their utility bills. For example, if a typical customer were to reduce/shift 30 percent of his peak-period load, he would see a 10 percent bill reduction. At the same time, if a customer does not change her usage pattern, the impact on her bill will be plus or minus 5 percent. Since the primary objective is to obtain econometrically sound estimates of own-price and cross-price elasticities, the SPP includes multiple rate levels for each rate type. The SPP also will measure the overall conservation-total usage reduction-effect of various dynamic pricing options.
An illustrative residential CPP rate is shown in Figure 1. The current average rate, which is a function of a complex, five-tiered rate structure, is approximately 12.7 cents/kWh in the summer. Under one of two experimental rate options, on most summer days, the CPP-F rate will charge roughly 24 cents/kWh during the peak period from 2 p.m. to 7 p.m. on weekday afternoons, and 7.2 cents/kWh the rest of the day and on weekends. However, on up to 12 summer days, the charge could be as high as 73 cents/kWh during the peak period.
The SPP includes a gross sample of 2,575 customers across six segments. This is expected to yield a net sample of 2,060 customers, assuming that 20 percent