Dynamic pricing

Regulators and customers are holding utilities’ feet to the fire, when it comes to investing in advanced metering and smart grid systems—and rightly so. Making the most of investments requires a systematic approach to establishing standards and monitoring performance. But it also requires policy frameworks and cost recovery regimes that provide the right incentives.

Are residential time-of-use prices only effective for middle class households, or do low-income customers benefit too—as authors Lisa Wood and Ahmad Faruqui asserted in their October 2010 article? Data from pilot programs show that low-income customers exhibit a reduced ability to benefit from dynamic pricing. Demand response programs should accommodate the realities of low-income customers’ consumption patterns.

Regulatory policies are evolving to make demand response and smart-grid planning a reality across the country. Cooperation between federal and state lawmakers will allow local flexibility within a uniform national framework.

Pilot projects are demonstrating the potential of smart metering and smart rates to make the most of supply and demand resources. But as empirical studies show, not all pricing designs are equally suited to every region.

As utilities announce new smart-grid programs, they need a strategic method for quantifying benefits. Analytical models generate baseline benefit estimates and reveal big-picture trends. Decision makers need the best resources available to mitigate risks in choosing a smart-grid strategy.

Achieving the smart grid’s potential requires a revolution in electricity pricing. Smart metering and smart rates might yield surprising and beneficial changes in the U.S. utility industry. But capturing those benefits will require an intelligent and careful approach to implementing dynamic pricing.

Contrary to conventional wisdom, electricity demand isn’t immune to price elasticity, and rate designs can encourage conservation. In particular, inclining block rates coupled with dynamic pricing can cut electric use by as much as 20 percent.

The time has come to start the transition from the current economic demand-response programs to demand response that arises naturally through market-based retail pricing.

Over the past few decades, utility sponsored conservation and load-management programs have helped thousands of customers better manage their energy costs. While these programs have helped lower overall electricity use, they generally have not provided an economic incentive for customers to reduce their consumption at specific times in response to wholesale electricity prices.

Does demand response increase or decrease overall electricity usage?