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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

and Ex-Post Solution

Is there a way when pricing two-part RTP to reduce these exceptions and in the process remove the need for a CBL load shape which, as previously mentioned, buyers want to minimize anyway? And can this solution still enable the seller to cover his fixed cost revenue requirements.

Yes. The key is to unbundle the risk premium from the fixed-cost coverage requirement and offer it to the customer as an ex-post risk premium option in the form of a CfD; and to develop an ex-ante access charge for the fixed-cost requirement.

An ex-ante access charge is computed upfront based on a forecast of spot prices. An ex-ante access charge can better guarantee the seller recovery of fixed-cost requirements without the need for the seller to purchase a CfD or hedge for himself if the seller merely passes the spot prices on to the customer. If a seller is offering to the buyer an ex-post access charge, he may not obtain the fixed cost coverage that is required unless the seller purchases a CfD to protect himself from rising spot prices.

The customer, however, does not have an overall price guarantee with an ex-ante access charge like he does with an ex-post access charge. For this reason, the customer must be offered an ex-post risk premium price protection product in the form of a CfD. This will enable the customer to configure the same protection as offered by the current ex-post bundled access charge (See ).

When designing an RTP program, it is vital that one employ a two-part design. It is now possible to do so in two ways, both capable of achieving highly successful results: (1) spot pricing plus an ex-post access charge (or CBL); or (2) spot pricing plus an ex-ante access charge and the offering of financial products (CfDs).



Two-Part Real-Time Pricing in Action

A. Standard tariff rate = 5 cents/kWh and includes an inherent risk premium of 0.5 cents/kWh

B. Expected average RTP price = 3 cents/kWh

C. CfD Price = 3.5 cents/kWh; a risk premium of 0.5 cents/kWh over expected RTP in order to cover risk of guarantee; RTP customers (as well as the utility) can purchase a CfD at this price

D. Load in question is 100 percent load factor (i.e., constant in all hours); the methodology will work with any load factor. It merely requires that the prices in the assumptions above be load-weighted. Metered load exactly equals CBL load.

E. Fixed cost coverage requirement is 1.5 cents/kWh (i.e., 5 cents -3 cents - 0.5 cents= 1.5¢)

F. Net revenue stability (i.e., reduced volatility) is a desired goal of the utility, and cost stability is a desired goal of the RTP customer.

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