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Rethinking Prices

The changing architecture of demand response in America.

Fortnightly Magazine - January 2010

this is the type of path-breaking research project that could only be led by national organizations such as DOE, EPRI or FERC.

Finally, the analyst could decide to conduct his or her own pilot. He or she should be prepared to answer management and regulatory concerns about the cost-effectiveness of the pilot. The method used to assess the value of the pilot in California provides a useful point of reference. Emphasis should be placed on testing new concepts, not just repeating old concepts. A particularly comprehensive and innovative design featuring 8,000 customers was laid out by Commonwealth Edison last year. 17 This design was reviewed and approved by the Illinois Commerce Commission in October 2009 and will be rolled out in 2010. 18

The Com Ed pilot will test a variety of customer applications consisting of rate designs, Web portals, in-home displays and smart thermostats in 24 combinations. Notably, it will test inclining block rates, which haven’t been the subject of controlled experimentation anywhere else. And its dynamic pricing rates will overlay critical-peak pricing rates, and peak-time rebates will be layered on top of hourly pricing rates, another untested innovation. In many ways, the project has raised the bar for experimental design—and provides a preview of how accurate empirical data will clarify the future of DR in America.

Closing the Data Gap

At FERC’s technical conference in November 2009, John Haney of Florida Power & Light summed up the issues well when he said, “True DR pricing mechanisms, as distinguished from traditional time-of-use and similar programs, have to date only had limited pilot testing. Though promising, their persistence and reliability is as yet unknown. The good news is that the next few years will present the opportunity to evaluate various alternatives through company-specific research and trials on a broader scale as AMI begins to be more widely deployed. Since there are no long-term experienced operators today, the dissemination of others’ experiences and tools amongst providers could prove valuable to many.” 19

The need for pricing pilots is unlikely to abate with time, since customer needs continue to evolve with changes in social mores and cultural norms. The biggest such change in recent history has been the acknowledgment of climate change by the general public.

In terms of new rate designs, we can expect to see future rate designs being tasked with multiple social objectives such as energy efficiency, demand response and renewable energy. Combination rates featuring inclining blocks, dynamic pricing and time-of-day pricing will become the norm. Ethnographic research will need to be carried out so that pricing information can be conveyed simply and directly to customers. Energy bills will have to be redesigned so customers can see a clear connection between their energy using behaviors and their utility bills.

There will be rapid innovation in the technology space as well. Smarter in-home displays and other ways of providing feedback about energy use patterns and costs will become commonplace, as will smart price-sensitive appliances. Additionally, we will see the rapid deployment of such customer-side renewable resources as roof-top mounted photovoltaic panels and