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Building a Risky Business

The diversity in customers’ appetites should be considered by more utilities when pricing products.

Fortnightly Magazine - March 2007

be able to create energy-bill savings greater than the cost of the installation and related costs. A well-crafted time-of-use (TOU) tariff might be appealing to this customer as a means to accomplish this energy efficiency solution.

Conversely, a school or government organization might have an important need to meet its 12-month fiscal energy budget as excesses create major headaches. Weather variations and impacts on energy bills are a continual challenge. For this type of customer, a fixed bill might be best.

So, a supplier/utility should offer a portfolio of pricing products based on sound risk fundamentals. The more a pricing tariff transfers to the customer the fundamental underpinnings of electricity, the more complex and risky it becomes for the customer. If the commercial or industrial (C&I) customer wants simplicity (for example a constant fixed cents/kWh), it must come at a price premium commensurate with the risk retained by the utility provider.

Efficient Pricing Products

Here are some illustrative portfolio-product additions that an innovative, customer-focused utility might provide to its customers:

Real-Time Pricing (RTP) - Hour Ahead (HA). The price per kilowatt-hour is based on the supplier’s marginal cost or market price, with a commensurate small risk adder. This tariff is the least risky for a utility to offer since it places nearly all cost and load-shape risk on the customer. The incremental RTP price changes hourly with an hour’s advance notice. Often there is an access charge (customer baseline load, or CBL) that covers non-marginal/market cost and offers some price guarantee. This product is very popular with large industrial customers (≥ 5 MW) that have considerable site-usage flexibility and low product margin. It induces very large demand response to high prices.

Real-Time Pricing (RTP) - Day Ahead (DA). This product is similar to RTP-HA except that price notification is a day ahead instead of an hour-ahead, and it carries a higher yet still relatively small risk adder. The day ahead version of RTP shifts much of the load shape and cost onto the customer, although not quite as much as does its hour-ahead RTP cousin. This product is popular with medium (> 250 kW) to large business customers. It induces large demand response to high prices.

Price Protection Products (PPP). PPP is a financial product that provides price assurance and stability to hedge against price volatility inherent with spot pricing or RTP. It enhances the overall RTP product line and makes it much more robust and popular.

Because it is a financial product, it does not disturb the RTP customer’s incentive to price respond. 2 It accepts back from the RTP customer what would have been RTP cost risk (since PPP’s have fixed usage constraints, ultimate load-shape risk remains with the RTP customer subsequently retaining the value of price response) and therefore justifies a modest risk premium.

Efficient Interruptibles. These products usually take the form of rate riders and compensate the end user for the willingness to interrupt usage of electricity when requested. These products are typically voluntary offerings from the utility or the independent system operator (ISO). The major differences between