HOW DO CUSTOMERS RESPOND TO REAL-TIME PRICING?
Even when the customer is a commercial or industrial organization, the answer can prove illusive.
Real-life responses to RTP depend on the entirety of the incentive and monitoring systems, group dynamics and individual personalities. Managers within an organization respond to RTP signals based on information and incentives that only they can know and comprehend. Only people employed by the organization are privy to these intangibles, which remain highly idiosyncratic within any organization. As a result, any analysis of RTP responses can never rise above the preliminary or the suggestive.
The ability to self-generate to provide stand-by or backup power allows a customer to shift load off the system when prices exceed the costs of self-generation. In addition, the product lines produced by a customer, the industrial processes used, and the desire or need for employee and customer comfort are important considerations affecting individual responses. Incentives for cost-saving and the sanctions for violating company guidelines may be decisive in assessing the ability to respond to RTP signals. Moreover, the specific conditions that vary from one hour to another during the day, such as temperature and climate conditions, are more important in some organizations than in others. Only the employees know how to respond optimally on a real-time basis.
As a conceptual framework, a responsive customer is both able and willing to increase, shift or shed load. Increasing load during off-peak periods, and shifting load from peak to off-peak periods, obviously benefits the supplier since a larger or equal load is taken during a period when costs are lower. The only proviso is that the contribution during the off-peak period equals or exceeds the contribution on peak.
Load Controls: Manual vs. Automatic
Typical RTP customers are large industrial firms with at least 1 megawatt of non-coincidental demand. Overall, the larger the customer's load, and the more flexible its production and process scheduling, the greater its ability to reduce or shift usage from system peak to off-peak periods when provided with proper incentives.
A response to RTP prices can be accomplished manually or through automation. A manual response involves an employee or group of employees who physically turn equipment and fixtures on and off. An automated response involves little or no physical activity, since electronic devices turn the equipment on and off. This response allows computers to talk to other computers programmed to respond to predesignated signals.
While automated response measures require more equipment and capital expenditures, management avoids many principal-agent problems involved in administering the programs and monitoring the actions of those who carry out the manual response measures. Manual response measures require less capital but more administrative effort.
A responsive customer is able and willing to:
Increase load during off-peak periods. Super-cooling and heating are among the primary ways commercial customers respond to RTP price signals, but they are constrained by a desire to maintain levels of comfort and avoid a degraded environment. Moreover, commercial customers do not demand large incremental loads despite how low the price of electricity may become. And in response to high announced prices, they are limited again by quality degradation problems.
Shift load from on-peak to off-peak periods. Reschedule production runs to other times of the day, week or season. The company may choose to schedule employee vacations during high-cost periods.
Reduce load during on-peak periods. When consumers can shift their facilities from one power supplier to another, they obviously can reduce load by switching. They may also shift production to another plant where power is available at lower prices or by reducing their levels of production. Finally, they may reduce the load they take from their current supplier by using standby or backup generators.
Standalone generators are the most common source of alternate and backup power (see sidebar). They come in various sizes and capabilities and use a variety of fuels. The most common fuels are diesel and natural gas. Based on the capacity, fuel and related operating characteristics, the avoidable costs of standalone generators usually range from 7 to 10 cents per kilowatt-hour. There are often severe limitations on the start-up capabilities and duration the equipment can be run efficiently.
Another minor source of alternate or auxiliary power is from cogeneration. Universities such as Massachusetts Institute of Technology, Princeton, Temple University and the University of Florida (called Gator Power) have set up cogeneration plants that produce electricity and generate steam to heat buildings and chill water for air conditioning. However, cogeneration should be regarded more as a substitute for system-generated power than as an RTP response measure.
Reducing load may also be accomplished by the customer shutting down its production lines entirely or by shifting production to another plant. A three-shift manufacturing process can be reduced to two shifts, a two-shift process can be changed to a one-shift and a one-shift operation can be shut down entirely. Shifting to another plant may be cost effective for large, multi-plant customers who produce similar products in several different locations.
Curtailment: Applying the Breaks
Following are some examples of how different organizations respond to RTP programs using self-generation, energy-saving measures and shutting or shifting of production, or a combination of two or more of these tactics. While these examples are real, names have been changed to protect confidentiality.
Metal Industries is a copper recycling and manufacturing plant, using power for refining and stranding copper wire. Metal Industries generally runs 24 hours a day, 7 days a week. It has 14 MW of backup capacity consisting of: 1-MW diesel engine; 10-MW natural gas combustion turbine; and 3 MW of 1-MW natural gas engines.
There are 5 units in all, but 13 MW are fired by natural gas. These are used during the summer when gas is available and low-priced. Because Metal is an interruptible gas customer and has no gas storage, the generators are not available in the winter. Its costs of running the diesel engine is about 7 cents per kWh to run the diesel engine and about 4.5 cents per kWh for the gas engine. Any electricity price higher than 7 cents evokes a load-reducing response. Metal Industries can run its generators and drop load by 25 MW for only two or three continuous hours.
Metal has hour-ahead (25-MW load) RTP programs. The load is computer-monitored continuously, with close attention paid during the peak period from June through September. Load can be curtailed by 12 MW. Its response plan involves about 60 different people throughout the plant. Essentially, management announces the prices and informs the 60 responders that they should react in least-cost ways to conserve power and avoid high energy costs. Within the plant, management mainly uses moral persuasion to gain compliance. During the off-peak periods in the winter they generally ride through short intervals of two or three hours but respond to high prices expected to last five or six hours.
Metal can reduce its load by:
• Using backup power (reaction time is 10 minutes);
• Reducing dispensable functions (reaction time is 10 minutes to one day);
• Scheduling production at other times (requires about a 30-minute lead).
Because Metal runs a continuous-process operation, it relies more on load reduction than on load shifting.
Florida Plastic Corp. produces plastic liners for landfills and soil erosion applications. They have two shifts, one for production and a second for cleanup. Florida Plastic can respond quickly to high prices by starting two 1.8-MW diesel generators, which are run as long as necessary. Because the generators are available, management is more inclined to drop load to near zero kW of demand than to reduce or shift production. Florida Plastic has determined the RTP threshold price signal is 6 cents per kWh.
Real-Time University comprises about 300 buildings that have central heating and air conditioning. RTU buildings operate 24 hours a day, 7 days a week all year. A primary mission of the university is research, and the administrators feel the research mission can be accomplished better if facilities are available to faculty and students at all times. In 1983, the peak demand for the main RTU campus was 19 MW; the peak rose to 36 MW in 1996 and is expected to reach 48 MW in 1999. The facilities at the RTU main campus are growing rapidly, and there is a corresponding increase in the demand for electric power.
RTU takes power at a central station and single billing point. The main response to RTP has been to allow buildings to heat up during higher-priced periods. Few investments have been made to reduce the time-specific demand for power. Based on candid but confidential conversations with line personnel at RTU, the higher-level administrators seem interested in making capital investments in new buildings and facilities, but not in making investments that would lower operating costs. There is apparently little fear that cost reductions within the physical plant division will cause a reduction in future budget allocations, since they can devote monies to building fuel oil and coal inventories.
Interstate Containers is a saw pulp mill that produces lumber to build crates. It has one shift from 8 a.m. to 5 p.m. Interstate Containers is flexible and responds quickly to high prices because of the ability to self-generate and drop load to near zero. The company also can shift production to avoid paying high RTP prices. For example, when high prices are announced for 3 p.m. to 5 p.m. the next day, employees are asked to work from 6 a.m. to 3 p.m. to make up the production. Interstate Containers' price threshold is 6 cents per kWh.
Liberty Towers is an office building that operates one shift from 8 a.m. to 5 p.m. and cannot shut down. However, Liberty Towers can respond quickly to high prices because of its ability to generate power and drop its load to near zero. Its RTP price threshold is 6 cents per kWh.
East Coast Potteries processes clay and runs 24 hours a day, 7 days a week. It has stand-by generators but cannot serve the entire load. However, it can shut down if required and can shift about two-thirds of its load. East Coast's RTP price threshold is 7 cents per kWh.
When Customers Can't Respond
What about customers who have little ability or willingness to shift or reduce loads? Are they also candidates for an RTP tariff?
A customer may have limited ability or be unwilling to shift or reduce load and yet still subscribe to RTP pricing, as shown in these two cases:
1. When the proportion of electric costs compared with total cost is low and the cost of shifting or reducing is uneconomic, the customer may be willing to ride through the high-priced periods.
2. When the customer's business is seasonal and levels of operation levels are inherently low during system peak periods, there may be little ability to shift or reduce off the peak. In an extreme case, the customer might take minimal power during the system peak periods and take maximum power under RTP rates during the off-peak periods.
These examples may be viewed as the limiting cases for acceptable RTP rates and require detailed analysis and scrutiny. Clearly, when RTP lowers the average cost of power for the RTP customer and lowers average costs for the supplier it enhances value. It may do so as well when the RTP rate benefits only the RTP customer, while not harming the supplier or other customers, such as through cross-subsidies.
The last example is illustrative of this limiting case.
Cranberry County School System has 70 schools and a 50-MW load. The county is growing rapidly and builds at least one new school every year. Cranberry has a sophisticated control center that allows the energy manager and his staff to monitor and control the switches in all 70 schools. They can sub-cool the facilities during off-peak and just run fans during on-peak hours. There are no thermostats in the school rooms but rather heat sensors that allow the energy staff to regulate temperatures within a half degree. They can control the system at each facility. There are backup computers.
Blueberry High School is the only Cranberry school on a two-part RTP tariff. The power company suggested Cranberry try RTP and emphasized that the customer base load must be extremely low before the RTP rate would be competitive with rates offered by competitive suppliers. The energy manager for the school system is interested in the annual cost of electricity. He said the day-ahead announcement of hourly RTP would require more workers since someone on his staff would have to monitor the announcements. He also said they would generally ride through a three- to-five-day high-price RTP period to take advantage of the lower off-peak rates. He said there was very little opportunity for load shifting at Blueberry. RTP for Blueberry is more a competitive rate offering and benefits the school system while possibly not harming the supplier. Whether it prevents uneconomic bypass or not is difficult to find out without knowing the costs of alternative suppliers. Similarly, there is a possibility that other customers are cross-subsidizing Blueberry, but whether that occurs depends on regulation (i.e., price or profit regulation) and the avoidable costs of the supplier. F
Albert L. Danielsen is a professor emeritus of economics at the University of Georgia and a consultant with Arthur Andersen Global Energy Consulting Group. He was one of the principal editors of Principles of Public Utility Rates, 2d Ed. (Public Utilities Reports Inc.), the 1988 update of the classic text by James C. Bonbright. Nainish K. Gupta is an energy management specialist with El Paso Energy Marketing.
Who to Target
Companies able to self-generate, including:
• Wood processing (such as sawmills)
• Metal processing
• Agricultural enterprises (such as chicken houses)
• Hospitals/nursing homes/retirement homes
• Large manufacturing
Companies able to reduce load, by shutting down production for short durations or shifting production to another plant, including:
• Industrial process customers
• Operators of large office buildings
• Retail stores (e.g., shopping malls)
• Hotels and motels (large)
• Colleges and universities
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