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Dynamic Pricing Solutions

How to account for lack of strong price signals. A hard year puts deregulation to the test.

Fortnightly Magazine - January 2009

The overriding objective of dynamic-pricing programs is to create a financial incentive for electric customers to curb load on the grid when the electric system peaks, either by conserving energy, shifting use to off-peak periods or generating electricity on-site. Such action by customers helps enhance reliability and curb the potential for market-power abuse by generators; most important, it obviates the need to build central generation and delivery capacity to serve load that occurs in only a small number of hours. Indeed, experts believe most of the customer benefit from dynamic-pricing programs comes from avoided generation, transmission and distribution capacity costs rather than avoided energy costs. 1

Some also believe that a wide-spread implementation of dynamic-pricing programs ultimately would eliminate the need for subsidized demand-response (DR) programs, in which all customers pay some customers to drop load during event hours called by the system operator during system peaks. 2

But in New York state, the hourly prices that utilities pass through to customers in their mandatory hourly pricing (MHP) programs do not send strong signals to upstate New York customers during peak demand periods (see Figure 1) . Electric load consistently peaks in the summer months. New York state consistently uses about 10 percent of its generating capacity (~3,200 MW) in just 100 summer-time hours. In contrast, driven by spikes in the price of natural gas, day-ahead electricity prices in upstate New York generally peak during the late afternoon and evening hours of the winter months. Day-ahead price signals in much of downstate New York also are more muted than one might expect at the time of the system peak.

The lack of strong price signals at the time of the system peak might not be so surprising, especially to those who follow developments in wholesale energy markets. What is, however, surprising is the growth of support for advanced-metering and dynamic-pricing programs in New York state when the day-ahead price signals that help to substantiate these programs seem so muted. The lack of strong price signals reduces the financial incentive for customers to make their operations more flexible and to install the on-site generation needed to curb grid-supplied demand during peak periods. The lack of strong price signals, therefore, undermines a key objective of implementing hourly pricing programs, weakening the case for installing advanced metering infrastructure (AMI) and providing customers load-curtailment services predicated on strong price signals. Indeed, a recent study found that the incremental annual savings available to the average mass market customer in National Grid’s upstate New York service territory under an hourly pricing program is

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