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Dynamic Pricing and Low-Income Customers

Correcting misconceptions about load-management programs.

Fortnightly Magazine - November 2010

Both of the CPP rates were designed to be revenue neutral relative to an existing rate of $0.13 per kWh.

CPP Rate Design #1 : The first CPP rate included a critical peak price of $1.25 per kWh during a four-hour peak period from 2 p.m. to 6 p.m. on fifteen critical days in the summer for a total of 60 hours. During the other 8,700 hours of the year, the rate is roughly $0.11 per kWh, which was $0.02 lower than the regular flat rate.

For a revenue-neutral dynamic-pricing rate such as this, it might be expected that half the customers in a utility’s service area immediately would see higher bills, and the other half immediately would see lower bills. And, when the rate is applied to the entire sample of customers, and assuming no change in usage patterns, that’s what happened.

As indicated by the blue curve in Figure 1, about 50 percent experienced monthly bill decreases and about 50 percent experienced monthly bill increases under the dynamic rate. Next, the same computation was performed for just low-income customers. As shown again, roughly 65 percent of the low-income customers see their monthly bills decrease on the CPP rate, even without changing their usage pattern during peak periods. This can be attributed to their load shapes being flatter than the average customer’s.

CPP Rate Design #2 : To test the sensitivity of these results, customer bills were re-computed using a second CPP rate, Rate Design #2. This rate applies only during the four summer months ( i.e., June through September) and is seasonally revenue neutral.

The rate involved a critical peak rate of roughly $0.90 per kWh applied for a five-hour period from 2 p.m. to 7 p.m. during 15 critical summer days— i.e., about 75 hours between June 21 and September 21. The off-peak rate is $0.10 per kWh during the four summer months. During the other eight months of the year, the current flat rate of $0.13 per kWh is in effect.

Under this CPP rate (see Figure 2) , about 60 percent of residential customers would realize monthly bill decreases even without shifting their usage. 2 For low-income customers, nearly 80 percent are immediately better off and realize monthly bill decreases on this CPP rate even without shifting their usage.

The results of the simulations indicate that the percentage of low-income customers who will benefit from dynamic pricing by realizing lower monthly bills, even without shifting their usage, depends on the rate design itself. Overall, however, it’s highly likely that more than half of low-income customers immediately will benefit from a CPP rate even without shifting their usage.

The Second Perspective

To gain some insight on the second issue—how low-income customers respond to peak-pricing signals—the authors analyzed empirical evidence from four recent utility pilot pricing programs, and one full-scale pricing program.

The studies analyzed were: Baltimore Gas & Electric’s (BGE) Smart Energy Pricing Pilot; Connecticut Light & Power’s (CL&P) Plan-it Wise Energy Pilot; Pepco’s PowerCentsDC Pilot; the early results from a full-scale program that