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The Barriers to Real-Time Pricing: Separating Fact From Fiction

Real-time pricing has been hindered by the misperception that a shift to RTP will create new types of risks, without creating benefits for utilities or customers.
Fortnightly Magazine - July 15 2002


Real-time pricing has been hindered by the misperception that a shift to RTP will create new types of risks, without creating benefits for utilities or customers.

During the past two decades, real-time pricing (RTP) has spawned a cottage industry of experts who continue to wax eloquent on its benefits. RTP can indeed provide substantial benefits to energy customers and utilities. However, only a handful of utilities offer such programs, and only a few thousand customers receive RTP service. This paradox resolves itself once we realize that there are significant barriers to RTP, many of them having to do with perceptions and not reality.

The overarching barrier to widespread application of RTP is a misperception that a shift to RTP will create new types of risks for utilities and regulators, without creating commensurate benefits for either utilities or customers. Both utilities and regulators have become risk averse in experimentation with new policies, having been burned first in California and then in the Enron crisis. The challenge is to convince them that no such failures await them with implementing RTP.

Another barrier is a misperception that a prerequisite for RTP is competition between retail energy service providers. However, as the examples of California and Georgia illustrate, retail competition is neither sufficient nor necessary for RTP.

The vast majority of customers have a natural reluctance to participate in RTP because they equate higher price volatility with higher prices, which in their minds translates into higher bills. They do not realize that higher price volatility often means that prices will be very high during a certain number of hours, but very low during a greater number of hours-potentially with lower annual bills. Of those customers who realize that higher price volatility may well translate into lower expected bills, a large number are risk averse. These customers are not inclined to "play the market." Other customers believe that the effort involved in any type of load shifting outweighs any potential benefits. And then there are some paranoid customers who think that RTP is just another way for their electric utility to gouge them.

These perceptions are borne out in a series of market research studies that have been conducted over the past five years. In these studies, researchers interviewed customers about their preferences for a range of pricing options, based on their stated intent to buy or not buy one or more of these products ().

For example, customers are willing to pay real money to avoid being placed on a time-dependent rate structure, such as seasonal, time-of-use (TOU), or RTP. 1 In fact, large commercial and industrial (C&I) customers would be willing to pay a premium of .33 cents per kWh in a flat rate, rather than be placed on a two-part RTP. Small and medium C&I customers would be willing to pay a substantially higher premium, of 3.9 cents per kWh, to avoid being placed on hourly prices. These perceptions constitute a real barrier to RTP.

As the example of utilities such as Georgia Power illustrates, it is possible to overcome this barrier through