Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

Transition to Dynamic Pricing

A step-by-step approach to intelligent rate design.

Fortnightly Magazine - March 2009

could be simplified, or how best to achieve such simplification while reflecting sufficiently the key underlying economics of electricity supply.

There are many ways to make tariffs simpler and to help customers better understand and respond to price signals. A useful start would be to just simplify bill presentation by creating a simple summary sheet at the top of the bill and placing into a backup document the large amount of extraneous information contained in current bills ( e.g., all of the unbundled bill amounts). Of course, one could seek to simplify tariffs themselves. For example, a simpler dynamic rate is what some refer to as a pure critical-peak pricing (CPP) rate, which preserves the dynamic nature of CPP without the burden and confusion of facing a time-varying rate every weekday. A pure CPP rate, with a high price on a limited number of emergency days and a single low price on all other days with no increasing block structure, would be fairly simple for customers to understand. On the other hand, such a rate focuses only on DR and not on energy efficiency. Alternatively, one could use a more complex, cost-reflective tariff that incorporates time variation and increasing block pricing, and rely on technology to automate response to price changes or to translate the complex tariff into more understandable information through, for example, in-house displays that report cumulative and incremental bill amounts.

None of the above examples, however, address the most fundamental challenge of electricity pricing, namely, the fact that no matter how simple the tariff, customers don’t know what a kilowatt-hour is or how much it costs them to do a load of laundry or a load of dishes or to run their refrigerator for a day. That is, customers don’t know whether the simplest tariff, say 10 cents/kWh, means that it costs 5¢, 25¢, or 50¢ to wash a load of dishes, or that a 5-degree change in a thermostat translates into a $1 savings on a typical summer day or a $2 savings on a really hot summer day. Consequently, the industry needs to explore the feasibility of service level pricing, that is, pricing based on the end-use services consumed.

Would such an outside-the-box pricing strategy improve consumer decision-making? Could one be designed to reflect accurately the underlying economics of electricity supply? An example might be 10 cents for a load of wash done after 8 p.m. at night, but 30 cents for the same load done between noon and 8 p.m. during summer weekdays. While implementing such an approach might present many practical challenges, the potential benefits could be huge. Indeed, this might be the only sure way to significantly improve customer decision-making.

Completing the Transition

Any move to default dynamic-pricing rates is bound to create some anxieties, because it will make some customers better off and some other customers worse off. Of course, all customers will have the opportunity to become better off by lowering peak demands, especially on critical days, but they might be unwilling to try this out unless their concerns are addressed.