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Metering and Billing: Building a Better Pricing System

Two-part real-time pricing reflects the two-part pricing found in other business sectors.

Fortnightly Magazine - May 2004

financial instrument is known as a contract-for-difference (CfD), or "swap." It specifies a quantity, time period to be covered, and settlement price. The difference in the settlement price and the actual spot prices over the specified time period is multiplied by the quantity specified, resulting in the overall settlement amount between buyer and seller. For instance, if the CfD agreement had been for 3.5 cents/kWh and the actual average spot price had been 4 cents/kWh over the contracted month of June for a contracted amount of 1,000 kW, then the seller of the CfD would pay the buyer of the CfD as follows:
[4 cents/kWh - 3.5 cents/kWh] x 30 days x 24 hours/day x 1,000 kW = $3,600

Had the buyer of the CfD also purchased actual kilowatt-hours on the spot market at the rate of 1,000 kW/hour for each hour of June, his spot priced bill would be:
4 cents/kWh x 30 days x 24 hours/day x 1000 kW = $28,800

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Now the buyer can combine his financial bill, showing a credit of $3,600, with the metered electricity bill of $28,800 to show a net bill combination of $25,200 or 3.5 cents/kW. He has, therefore, effectively hedged his electricity cost via the CfD at 3.5 cents/kWh. Also, had the average spot price been 2.4 cents/kWh, his combined price of electricity with the CfD still would have been 3.5 cents/kWh.

When the seller of the CfD (and he doesn't have to be a seller of electricity on the spot market) is developing the price he is willing to offer a CfD, he must consider the various possibilities of prices on the spot market in order to develop an expected price, and then add a risk premium accounting for the fact that prices may actually be higher than the expected value. This effectively becomes his floor price for a CfD. If he can get more for his CfD, he will try to do so, but competitive forces of other CfD sellers and knowledge by the buyer of price expectations will minimize departures above this floor price for a CfD.

The algebra of the combined bill for the buyer would look as follows:

= Quantity specified in the CfD contract for each respective hour i of the contract price

= Quantity purchased through the meter for each respective hour of the billing period

= Spot price of electricity in each hour i of the billing period

= Agreed-to settlement price for the contract period

Assumptions:

  • Contract period for CfD equals billing period for metered consumption
  • TB= Total Bill
  •  

Then:

Since Pi is unknown until the end of the billing period, this "access charge" is ex-post. Once could also rearrange the algebra with the given assumptions such that:

Also, one could define a contracted or "protected" load to be: Customer Baseline Load (CBL) =

Two-Part RTP

Now let's focus upon two-part RTP pricing as demonstrated by such utilities as Georgia Power Company, Duke Power Company, Niagara Mohawk, and Central and Southwest. The first part of this innovative tariff is a CBL usually