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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

these efficient interruptible products and the traditional interruptible product are: 1) they are based upon actual avoided cost; and 2) there is a fixed per-kilowatt-hour credit coupled with a per-kilowatt or per-kilowatt-hour usage credit applied whenever interruptions take place based upon the actual amount of load that is interrupted. Both these advanced features lower the utility’s product risk, while this last feature removes some of the distaste for an interruption that customers have with the traditional interruptible products.

Critical Peak Pricing (CPP). This innovative pricing product enables a form of RTP (or dynamic pricing) to be attractive to customers ranging in size from residential all the way up to moderate-sized commercial customers. It is fundamentally a time-of-use (TOU) tariff, but with a limited number of hours in which the utility can invoke a critical, high price. This limitation often is 75 to 100 hours per year. It is, therefore, a hybrid between RTP and TOU and is popular with those customers wanting to employ their limited usage flexibility for price concessions derived from the transfer of risk from utility to customer for the limited CPP hours. These limitations on critically priced hours should enable the product to be more attractive to residential and small to mid-size business customers than would be RTP. The product is in its infancy and drawing a lot of interest. Gulf Power Co. is a major advocate of CPP. Demand response for a utility employing CPP can be considerable because of the large numbers of participants that are attracted to CPP. Individual response can be in the range of 2 kW per customer per call and has the potential to provide up to 5 percent of the utility’s reserve needs. Another CPP variation is to pay customers for response via credits per kilowatt-hour but without a critical priced charge for usage during what would have been the critical priced hours. From the customer’s perspective this application therefore offers possible gain (credits) but without pain (high prices for CPP kilowatt-hours).

Efficient Time of Use (TOU). TOU pricing is nothing new to the utility industry. However, it has enjoyed limited success and customer interest. A major reason for this disappointment pertains to TOU design flaws. (Another is lack of marketing.) A successful TOU design must incorporate marginal cost strategically, while at the same time recovering embedded revenue requirements. It also must consider the target customers—not only their load shapes, but also their response capability. For example, an on-peak period lasting 8 to 10 hours makes it very difficult for a commercial customer to move significant load to an off-peak period. Efficient TOU-pricing products are similar to standard TOU products except for the following attributes:

a. The period durations (such as the hours within the peak period) consider customer load-shifting capability.

b. The on-peak price is based upon marginal cost or expected market price.

c. The on-peak to off-peak price differentials are sufficient to induce load shifting. Those differentials are often 4:1 to 5:1.

While not as effective in moving risk as RTP, well-designed TOU tariffs do signal period cost differentials.