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Rethinking 'Dumb' Rates

Achieving the smart grid’s potential requires a revolution in electricity pricing.

Fortnightly Magazine - March 2009

those charged to non-CPP customers.

Peak-time rebate (PTR) , whereby the customer is retained on the traditional blended rate but is offered a generous rebate for reducing load during critical peak periods. This necessitates the calculation of a baseline usage level for each customer.

Real-time pricing (RTP) , whereby retail customer rates reflect hourly variations in wholesale markets. Economists consider this perhaps the truest retail price signal.

What all three methods have in common is temporal variation that reflects actual deviation in costs. All three methods of dynamic pricing currently are being tested in the Nation’s Capital through a pilot program called PowerCentsDC. 5

Dynamic pricing can be coupled with remote controls, for example through the Internet, and can be enhanced via enabling technologies including smart thermostats, smart appliances, and other emerging technologies such as plug-in hybrid electric vehicles (PHEVs). In fact, besides taking advantage of low off-peak rates to charge their batteries, PHEVs also could serve as a valuable source of distributed generation when the grid is under stress. 6 The right kind of pricing, integrated with these emerging technologies, has the potential to revolutionize the way electricity is generated, delivered, and consumed.

How do customers respond to dynamic pricing? Well enough to make it a very potent pricing tool. Empirical evidence consistently demonstrates a significant response, although its magnitude varies across different types of customers. Some customers respond substantially and others not at all. Overall, dynamic pricing produces a measurable decrease in peak load, and customers usually save energy while reducing their bills.

How much do peak loads decline due to dynamic pricing? Customer response is typically in the range of 12 to 20 percent of peak. 7 Results depend on several factors, including rate design, local climate, and the availability of enabling technologies. The impact of enabling technologies can be quite significant, accounting for results at the upper end of this range.

Consumer Benefits

What about consumer benefits of AMI and dynamic pricing? Do they justify sacrifices customers are asked to make? And do they justify the cost of a full-scale roll-out of AMI? On these questions, there is great diversity of opinion.

Advocates (particularly utilities) may argue that AMI deployment is cost-effective, citing operational savings such as reduced metering costs and more efficient outage restoration. They also cite the ability of customer demand response to dampen price spikes, thereby reducing bills for all customers. Finally, they point to intangible benefits, such as improved customer options.

Critics (including some consumer advocates) argue that AMI deployment has not been demonstrated to be cost-effective and may serve as an excuse for utilities to raise rates. They question the long-term customer response to dynamic pricing, noting that some customers, especially low-income consumers, can’t respond to price signals. Critics argue that there are better and cheaper alternatives available, such as direct load controls by utilities. 8

Let’s explore some of these issues in more detail. AMI is credited with producing operational savings, some of which readily are quantifiable. These include reduced meter-reading costs (via remote metering); more efficient outage management and