Is the Time Right for Efficient Smart Electricity Pricing

1
Is the Time Right for Efficient (Smart)
Electricity Pricing?

• Steven Braithwait
• Christensen Associates Energy Consulting
• Mid-America Regulatory Conference
• June 17, 2008

2
Historical Background

• Traditional retail rates satisfy most accepted
  rate design goals
• Revenue recovery
• Rate bill stability
• Simplicity
• Efficient pricing addresses an historically
  overlooked goal economic efficiency in
  allocating resources
• This presentation is based on a recent EEI report
  on efficient pricing

3
Traditional Retail Rates

• One-size-fits-all rates apply to broad classes
  of customers
• Fixed rates reflect average historical embedded
  costs
• Customers in most rate classes display a range of
  load profiles, implying a range of costs to serve
• Potential bill impacts present barrier to change
  from status quo

4
Efficient Electricity Pricing

• Reflects the forward-looking, time-varying
  resource costs of consumers use of electricity
• Reflects relevant risks to energy providers
• Larger risk premium for products offering greater
  price certainty (insurance)
• Offers optional price structures that acknowledge
  diverse customer risk preferences
• Gives consumers opportunities to manage their
  energy costs
• However, requires smart meters AMI

5
Why Efficient Pricing Now?

• Falling reserves Rising costs Uncertainty
• Expected market costs exceed embedded cost-based
  rates
• High interest in demand response (DR) resource
  efficiency as partial substitutes for new
  capacity (EPAct 2005)
• New factors that support smart pricing
• Organized power markets provide transparent
  hourly wholesale prices basis for retail prices
• Expanding deployment, and improving business case
  for AMI

6
Cost-Saving Opportunities from Efficient Pricing

• Traditional rates imply disconnected wholesale
  and retail power markets
• Varying hourly wholesale costs
• Fixed retail rates
• Results in
• Non-responsive electricity demand
• Suppliers build extra generation capacity to
  reliably meet that non-responsive demand
• Efficient pricing can reduce those costs

7
Value of Demand Response Under Smart Pricing
Replaces Cost of Extra Peaking Generation
DR target 5 of max. demand 1 of hours
20 - 40 million/yr cost savings for 10,000 MW
system
Peaking generation
Load duration curve
8
Example of Efficient Pricing Current interest
in CPP/TOU

• TOU rates designed to reflect average difference
  in marginal costs in peak and off-peak periods
  (e.g., 0.12 vs. 0.05/kWh)
• Critical-peak price (CPP) replaces TOU peak rate
  on critical days
• CPP reflects expected marginal energy and
  reliability costs in top 1 2 of hours (e.g.,
  0.25 1.00/kWh, or more)
• TOU peak price is discounted to reflect removal
  of highest-cost peak hours

9
Lots of Alternatives to CPP/TOU

• Add CPP to standard non-TOU rate on critical days
  (avoids complications of designing voluntary TOU
  rate)
• Variable CPP More than one critical price e.g.,
  High Very critical
• Variable Peak Day-ahead on-peak pricing
  reflects costs more accurately
• Day-type TOU Low/medium/high TOU price profiles
  (e.g., Tempo rate in France)
• Critical-day rebate Voluntary CPP requires
  baseline calculation

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Variable CPP/TOU Rate
CPP (Critical)
CPP (High)
TOU on-peak
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How Do Customers Respond to Dynamic Pricing?

• Numerous studies show significant price response
  on average
• Considerable variability among individual
  customers, though some typical patterns
• Most responsive large energy intensive have
  facilitating technology (e.g., on-site
  generation product storage comm. control)
• Some evidence of 3 5 reduction in overall
  consumption conservation effect

12
Evidence on Customer Response to Dynamic Pricing
Residential

• Sources of information
• CAEC research
• Reviews of researchreports and presentations

Enablingtechnology
PermanentCPP rate 8,000 partic.
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Evidence on Customer Response to Dynamic Pricing
CI

• Sources of information
• CAEC research
• Reviews of researchreports and presentations

600 customers
14
Strategies for Encouraging Efficient Pricing

• Recover fixed delivery costs through
  non-volumetric rates (e.g., customer charges that
  vary by size, to protect small users)
• More attractive features e.g., shorter peak
  periods
• Adverse selection issue (bill savings w/ no
  response)
• Allow revenue recovery through balancing account,
  or standard tariff to acknowledge the lower costs
  of instant winners who accept dynamic pricing
• Move toward more customer-differentiated rates
• Allow utilities to benefit by sharing cost
  savings
• Give consumers choices pilots indicate they
  like time-varying rates

15
Conclusions

• Looming electric industry crisis?
• Declining reserve margins, high costs, limited
  options for new capacity, and considerable carbon
  uncertainty
• Efficient pricing gets the right signals to
  consumers before its too late
• AMI provides foundation for efficient pricing
• Time to move forward!