Pilot projects are demonstrating the potential of smart metering and smart rates to make the most of supply and demand resources. But as empirical studies show, not all pricing designs are equally...
Engaging customers will require more than TOU pricing.
2008 study 1 showed in PJM that the daily bid schedule increases sharply even on days when demand is far below the system peak. Thus, reducing de-mand at peak periods on most days would lower the market clearing price of power significantly.
Utilities and their regulators have been reluctant to embrace real-time pricing because they fear that customers could not cope with this price volatility. However, customers cope with volatile prices for commodities such as gasoline, fresh produce, and even airline tickets and hotel rooms. One difference is that the volatile prices for these other commodities do not change each hour. (Many restaurants, airlines, and movie theatres do have time-of-use or seasonal pricing, and London, Rome, Stockholm, Singapore, and Milan have variable tolls for vehicles that depend on levels of congestion).
Most pundits reject the notion that residential, or even small commercial and industrial customers, would be willing or able to embrace real-time pricing that would require regularly checking prices and then responding by changing their thermostats or getting up at 2 a.m. to do the laundry. Concern for the constraints on consumers’ attention and effort has led to the use of approximations to realize the savings potential associated with real-time pricing. The simplest approximation is time-of-use pricing, with two periods: peak and off peak. Experiments have shown that customers can understand this simple distinction and reduce their use during the peak periods. However, the PJM study and other analyses show that time-of-use pricing delivers only a fraction of the potential benefit that real-time pricing could produce. 2
A slight variant of time-of-use pricing, adding critical-peak pricing, can increase savings significantly. Consumers are advised, perhaps a day in advance, that a critical situation will exist, during which prices will be considerably higher. An experiment in Anaheim, Calif., in 2005 found that customers reduced demand, with a price elasticity greater than expected from previous econometric studies. 3 Given this experience, critical peak pricing could be used on a larger scale as advanced meters are more widely employed. 4
One of the Anaheim study’s key findings is that, once empowered, customers wanted more control over their electricity use and better information about how to lower their energy bills. A system that manages a customer’s energy usage without that person’s consent probably won’t be approved of by many customers. To be successful, a system must engage the customers—it must have their knowledge and consent.
Nonetheless, critical-peak pricing still only is an approximation of real-time pricing. Critical-peak pricing can handle anticipated high demand, but not the unanticipated demand of a weather change or a supply shortfall due to a generator or transmission line tripping. These unanticipated situations represent a surprisingly large proportion of the benefit of real-time pricing (see endnote 2).
Electronic Energy Manager
A utility could implement real-time pricing in a way that reduces the burden on customers to respond to price changes, and in particular to high price volatility. This would require providing individual consumers with an electronic energy manager combined with a smart meter and a display that they can program to respond