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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

TOU customers consequently may pay their cost of service on an aggregate basis (as opposed to RTP, which enables cost coverage better on an individual basis). And these TOU tariffs can encourage load shifting away from the utility’s peak period, thereby lowering the utility’s risk, while creating bill savings for the participating customers. Since prices are stable during all hours of the designed periods, TOU tariffs appeal to many customers as ways to lower cost without taking on inordinate risk. Voluntary, efficient TOU tariffs can achieve very good penetration rates thereby providing large reductions to utility loads during difficult peak periods.

Multiple Load Management. This load-aggregation design allows large customers with multiple sites to aggregate their load into one load shape and account for their load diversity. This is quite appealing to companies with multiple locations. Traditionally, utilities have shied away from such products because of possible revenue erosion. Some innovations, however, use access charges to avoid this revenue erosion. The product can produce benefits for the utility as well as the participating customers, since the parent company’s load management of the aggregate load shape often shaves the utility’s peaks better than individual site-load management will do. The product inherently lowers the parent company’s risk by allowing it to choose sites to reduce usage, while in so doing also aids the utility by lowering its peaks.

Retail Auctions and Exchanges. These voluntary programs offer credits usually based upon bid prices or the utility’s avoided cost. Initiation of the event can be performed day ahead or day of. The customer normally has the right to participate on a specific day or choose not to participate that day. If he does participate, he’s paid the “strike” price multiplied by his load response. Because the utility normally has the ability to set or accept the “strike” price considering its expected avoided cost at a time very close to the hour(s) in question, this tool can reduce risk significantly for the utility. And since it’s usually voluntary for the customer, it shouldn’t add much risk to the customer. There may or may not be a penalty if the customer agrees to respond but fails to do so. Volatile wholesale markets normally create the appeal for these products.

Fixed-Price Energy Only (Fixed Cents/kWh). This is similar to a flat cents per kilowatt-hour pricing product often offered to residential and small commercial customers except: 1) It is based upon sound risk fundamentals; and 2) it is offered also to large customers. 3 The implicit risk premium is correspondingly greater than TOU, traditional Hours-Use-of-Demand (HUD), and standard Customer-Energy-Demand (CED) tariffs, since it inherently absorbs considerable load-shape risk. This simple fixed-price product is attractive to residential customers as well as a broad range of commercial customers. An attractive feature of this product for business customers is the ability to avoid demand charges.

Fixed Bill (FB). This product, because it charges the customer a fixed bill amount per month, regardless of actual usage and without a true-up, places the greatest of all risk upon the utility and, therefore possesses the highest