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Special Section On Metering: Needed in New England: Stronger Market Connections, Savvier Electricity Usage

The region’s retail and wholesale electricity markets should be linked via dynamic pricing.
Fortnightly Magazine - April 2006

for all customers. In certain hours, particularly during supply shortages or peak demand, the steeply sloping wholesale supply curve creates tremendous leverage for a small reduction in demand to significantly reduce wholesale prices. As illustrated in Figure 1, the minor shift of demand from D1 to D2 results in a considerable reduction in price from P1 to P2. Further, price-responsive demand contributes to a more efficient allocation of society’s resources and improves the overall reliability of the wholesale electricity system. Since many wholesale price spikes coincide with periods of high demand, if customers reduce their use when demand is highest, it ultimately “shaves the peak” and lessens the need to build new capacity.

So, how can we modify the markets to encourage and empower customers to change their consumption based on changes in wholesale electricity prices?

One way is through the implementation of dynamic retail pricing. Unlike traditional fixed retail rates, dynamic retail pricing varies the retail price of electricity as wholesale prices fluctuate over the course of a day. Customers across the region can “see” the true price of electricity and can choose to shift their electricity use according to their sensitivity to price. This type of price-responsive demand is a powerful but virtually untapped tool to manage electricity use and costs. Such a tool may be particularly valuable in New England given customers’ recent exposure to rising energy prices (gasoline, home heating oil, natural gas, and electricity) and growing peak demand.

While demand-response programs and dynamic pricing rates are in many ways related to traditional energy efficiency programs, they are fundamentally different. Traditional utility-sponsored, energy-efficiency programs attempt to offer products and services to virtually all customer classes—residential, commercial, industrial, and municipal. From the smallest to the largest, across all income ranges, most utility programs offer something for everyone. But while customers from each customer class can benefit from dynamic pricing, such pricing may not be suitable for all customers.

Dynamic pricing works best for customers where electricity represents a significant portion of their operating expenses and they have the ability to reduce or shift consumption in response to high prices. Yet, not all customers have the ability or the desire to do this. Many customers may look at dynamic pricing and say, “No thank you; give me a fixed price just like I had before.” Because dynamic pricing is not for everyone, alternative rates and supply options need to be available for those customers who want the short-term price certainty that comes from fixed pricing.

The good news is that not all customers need to be price responsive for the region to experience significant benefits. The preliminary results of a dynamic-pricing study currently underway shows that retail customers in New England can potentially save approximately $340 million over the next five years if retail customers with 1 MW loads or greater are exposed to dynamic pricing. Less than 600 price-responsive customers in New England, each with loads greater than 1 MW, are needed to produce these benefits. The cost of achieving these savings (driven by additional meter reading and billing