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Dynamic Pricing and Low-Income Customers

Correcting misconceptions about load-management programs.

Fortnightly Magazine - November 2010

Studies are showing that dynamic electricity pricing—where prices vary based on system conditions, rising during critical periods for a few hours each year and falling during all other times—can benefit both customers and electric utilities alike. By encouraging customers to shift some of their demand on those critical days to off-peak hours, the higher peak prices can help utilities to defer the need for building additional capacity. And the lower off-peak prices represent a savings for consumers over their regular electric rate.

But how does dynamic pricing affect low-income customers who often are regarded as vulnerable? Different viewpoints yield different answers. 1

One school of thought is that low-income customers, because they use relatively less energy than the typical residential customer, would benefit from a rate that charges them more during a few peak hours and less during the vast majority of other hours during the year. And, if low-income customers did shift some of their demand from peak to off-peak hours, they would benefit even more. Others believe that low-income customers would be harmed by dynamic pricing because they have little discretion in their power usage, which means they would have less to work with in terms of shifting demand to off-peak hours.

To learn more about how dynamic pricing might affect low-income customers, a recent IEE whitepaper examined some simulations involving dynamic pricing. It also reviewed the empirical evidence from some recent dynamic pricing programs. Before looking at the results, however, it’s important to have a clear understanding about what dynamic pricing is. The two types of dynamic pricing that have gained the most attention in the power industry and among state regulators are critical-peak pricing (CPP) and peak-time rebate (PTR).

CPP attempts to convey the true cost of power generation during the 100 to 200 hours each year—typically during the summer—when demand reaches its highest levels. In exchange for paying very high prices during those peak hours, customers receive a discounted rate for all remaining hours of the year. An alternative to the CPP rate is the PTR, which is a mirror image of the CPP rate.

Under a PTR, customers remain on their current flat rate but receive a cash rebate for each kilowatt hour (kWh) they lower their baseline usage during the peak hours. Under a PTR, customers who do respond can save money on their monthly bill. If they don’t lower their usage their monthly bill would stay the same.

The First Perspective

To examine the first issue—whether the relatively flat load-shape of the typical low-income customer would help or hurt them under a dynamic pricing program—the IEE paper simulated two versions of a CPP rate: CPP Rate Design #1 and CPP Rate Design #2. The simulations were conducted using representative samples of residential and residential low-income customers from a large, urban utility.

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