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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

demand during the hour of the system peak, since each LSE must purchase enough unforced capacity for the next year to cover the peak demand of their customers in that hour plus a minimum reserve margin. 6 LSEs can collect these costs from customers however they see fit. They generally choose to do so in a manner that ensures that capacity inflows from customers match monthly capacity payments to generators in order to mitigate the risk of non-recovery. Establishing a rate design that sends a strong price signal to customers at the time of the system peak appears to be less of a concern. But it seems apparent that each utility simply could modify its existing approach to address this situation, and in so doing help to realize the ultimate goal of dynamic-pricing programs, which is curbing load at the time of the system peak.

New York State Electric and Gas (NYSEG) and Rochester Gas and Electric (RGE) collect capacity costs from MHP customers based on each customer’s capacity tag or, equivalently, the customer’s demand at the hour of the previous year’s New York system peak. Many energy services companies (ESCos) bill retail customers for capacity using a similar approach. This method helps the LSE ensure that it collects the amount of revenue needed to meet its capacity obligation to generators each month. In addition, each MHP customer is held directly responsible for its role in contributing to the prior year’s New York system peak. Customers with higher tags will have higher monthly capacity bills. The separate charge for capacity on each customer’s monthly bill also helps customers focus on ways to reduce this charge—especially since customers must live with their tag for an entire year.

The capacity tag approach does not send a dynamic signal to customers, but the charge associated with the capacity tag on each customer’s bill changes monthly and could be adjusted to send a stronger signal to customers during the summer months. Even if the monthly capacity charge is fixed each month, customers still have an incentive to reduce their peak usage in the summer as a way to reduce their capacity costs. Customers can either guess when the peak will occur or simply trim demand during summer time hours from 3-5 p.m. when the system is most likely to peak. The main drawback to the capacity tag approach is that it only works for customers who have interval meters.

National Grid collects capacity costs from its retail commodity customers in upstate New York by adding a class-specific kWh capacity charge to the NYISO’s hourly DALBMP each week-day from 12-8 p.m. The capacity adder creates a year-round financial incentive for hourly pricing customers to shift load away from week-day afternoon hours to mornings, evenings and week-ends. But the existing capacity adder does not send a strong incremental incentive to customers to modify use at the time of the system peak.

One way for National Grid to create such a signal would be to modify the capacity adder for each hour based on the relative probability that hour