Shaping our Energy Future through Dynamic Pricing · Shaping our Energy Future through Dynamic Pricing Ahmad Faruqui, Ph.D. Smart Grid Educational Series IBM Innovation Center Foster

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Copyright © 2012 The Brattle Group, Inc. www.brattle.com

Shaping our Energy Future through Dynamic Pricing

Ahmad Faruqui, Ph.D.Smart Grid Educational Series

IBM Innovation CenterFoster City, CAAugust 21, 2012

The views expressed in this letter are strictly those of the authors and do not necessarily state or reflect the views of The Brattle Group, Inc.

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Does Joe Schmoe know dynamic pricing?

If asked, he will say he does not, like Monsieur Jourdain who had been speaking prose all his life and still did not know what prose was

Joe has known dynamic pricing when he has bought an airline ticket, booked a hotel room, rented a car, gone to a Giant’s game, attended a symphony performance, gone to see a play or bought out-of-season produce in the farmers’ market

Lately, Joe has also known dynamic pricing when he has driven on the Fast Track lane on I-680, crossed the Bay Bridge, driven on weekdays into London or Singapore, and parked his car in the downtown areas of any major city

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For Whom the Bell Tolls

Dynamic pricing is a sine qua non for capital-intensive industries

It improves load factors and raises capacity utilization

By so doing, it lowers average costs It helps manage congestion It ensures that supply is available for high

valued uses


4

Dynamic pricing is pervasive in wholesale markets for electricity but not in retail power markets

Consequently, the annual load factor is under 60% for most utilities The top 1% of the hours account for 8-18% of the

annual peak load Generation capacity to meet the peak load sits

idle for most of the 8,760 hours of the year This puts significant upward pressure on

costs and rates


5

Is there only one type of dynamic pricing?

No, there are several Time-of-use pricing (TOU) Critical-peak pricing (CPP) Peak-time rebates (PTR) Variable-peak pricing (VPP) Real-time pricing (RTP)

Each of these types can be deployed as a one-part rate or a two-part rate

The different types can be combined to yield hybrids


Critical-peak pricing (CPP) in its pure form

Illustrative CPP Rate for Residential Class - SummerAll-In Rates

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

All-

In R

ate

($/k

Wh)

Existing Rate = 12.6 cents

Off Peak Rate = 11.4 cents

Critical Peak Rate = 123.4 cents

Illustrative CPP Rate for Residential Class - WinterAll-In Rates

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

All-

In R

ate

($/k

Wh)


Off Peak Rate = 11.4 cents

Customers get a discount on all hours except a few critical hours of the year

On a few critical days, customers pay a substantially higher price equal to the cost of capacity plus the average critical peak locational marginal price

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CPP combined with time-of-use (TOU) pricing

Illustrative CPP/TOU Rate for Residential Class - SummerAll-In Rates

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

All-

In R

ate

($/k

Wh)


Critical Peak Rate = 123.4 cents

Peak Rate = 20.5 centsOff Peak Rate = 10.2 cents

Illustrative CPP/TOU Rate for Residential Class - WinterAll-In Rates

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

All-

In R

ate

($/k

Wh)


Peak Rate = 20.5 centsOff Peak Rate = 10.2 cents

Customers are on a mild TOU rate on all non-critical days

On critical days, they pay a much higher price during the critical hours


The peak-time rebate (PTR) provides an incentive to reduce peak load but leaves the flat rate unchanged

Illustrative PTR Rate for Residential Class - SummerAll-In Rates

-$1.40

-$1.00

-$0.60

-$0.20

$0.20

$0.60

$1.00

$1.40

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

All-

In R

ate

($/k

Wh)


Peak Rebate = -110.8 cents

Illustrative PTR Rate for Residential Class - WinterAll-In Rates

-$1.40

-$1.00

-$0.60

-$0.20

$0.20

$0.60

$1.00

$1.40

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

All-

In R

ate

($/k

Wh)


Customers pay the default rate for all kWh used; if they make no changes in their usage they continue to pay the default rate with no extra costs (“carrot only” approach)

On critical days customers can earn a rebate reductions in usage below an estimate of what they otherwise would have consumed (their “baseline” calculation)


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In 2009, FERC estimated that demand response could reduce peak demand by up to 20% by 2019

650

700

750

800

850

900

950

1,000

2009 2011 2013 2015 2017 2019

GW

38 GW,4% of

82 GW,9% of

138 GW,14% of

188 GW,20% of

BAU 1.7% AAGR

Expanded BAU

1.3% AAGR

FullParticipation 0.0% AAGR

AchievableParticipation 0.6% AAGR

No DR (NERC) 1.7% AAGR

Source: FERC National Assessment of Demand Response Potential

Smart Grid Educational Series 9

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Aggressive pursuit of dynamic pricing could lead to substantial reductions in peak demand

0

50

100

150

200

Business-as-Usual

ExpandedBAU

Achievable Participation

Full Participation

Peak

Red

uctio

n (G

W)

0%

5%

10%

15%

20%

25%

% o

f Pea

k D

eman

d

Other DRInterruptible TariffsDLC

Pricing w/o TechPricing w/Tech

38 GW,4% of peak

82 GW,9% of peak

138 GW,14% of peak

188 GW,20% of peak


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Much of the untapped potential for dynamic pricing resides in the residential class

0

20

40

60

80

100

120

140

160

180

200

Business-as-Usual

ExpandedBAU

Achievable Participation

Full Participation

Peak

Red

uctio

n (G

W)

0%

5%

10%

15%

20%

% o

f Pea

k D

eman

d

Large

Medium

Small

Residential


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We updated some of the results in 2010

We polled 50 experts on the likely impact of demand response on peak demand in the year 2020

Location of Survey Respondents

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The responders spanned a range of affiliations

Profession of Survey Respondents


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The survey said that demand response was likely to lower peak demand by 7.5% to 15% in 2020


15

Where we are today?

About 33% of households are on smart meters and the figure is expected to hit 50% in five years

Within a decade, smart meters may be universally deployed

Only 1% of households are on time-based rates and only 1% of this 1% are on dynamic pricing rates


16

Flat-rate pricing is not inexpensive

Under flat rate pricing, inter-customer subsidies may amount to $3 billion/year We scale up the results from a California rate

design study that was sponsored by the Demand Response Research Center

Collectively, all customers may be overpaying for electricity by about $7 billion/year We take the FERC Staff estimate of 92 GW saved

under universal dynamic pricing and value demand response at $75/kW-year


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So why are we Waiting for Godot?

The train is still at the station because of three fears One: meters are expensive, that they are harmful

to health, that they violate privacy, and that they compromise cyber security

Two: customers won’t respond to dynamic pricing, since electricity is a necessity

Three: customers will over-respond to dynamic pricing in order to save money and endanger their good health


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These fears appear to be as old as time itself

I have been hearing them since I began my career

Those senior to me had told me that they had been hearing them since they began their careers

The good news is that we now have a mountain of empirical evidence with which to assuage the fears


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Customers do respond to price signals, as seen in two dozen pilots around the globe

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Arc of Price Responsiveness

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Enabling technology further enhances price responsiveness

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Arc of Price Responsiveness


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The more things change, the more they stay the same (plus ça change, plus c'est la même chose)


0%

25%

50%

75%

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Peak

Red

uctio

n

Peak to Off‐Peak Price Ratio

Hot climate, all major electric appliancesPrice OnlyAverage HouseholdCool climate, no major electric appliances

Arc of Price Responsiveness (1982 + current price-only)

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As many as 80% of low income customers may be over-paying for electricity today

.


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Contrary to popular perception, even low income customers respond to dynamic pricing

22%

50%

66% 66%71%

84% 85%

100% 100% 100%

0%

20%

40%

60%

80%

100%

120%

CaliforniaSPP: CAREvs. Average

PG&ESmartRate

2009: CAREvs. Average

PG&ESmartRate

2008: CAREvs. Average

CL&P'sPWEP

Program(PTP high):

Hardship vs.Average

HydroQuebec:

Low Incomevs. AverageResidential

CaliforniaSPP: LowIncome vs.

Average

Pepco DC(price only):Low Incomevs. AverageResidential

BGE 2008:Known LowIncome vs.

KnownAverage

Customer

CL&P'sPWEP

Program:Known LowIncome vs.

KnownAverage

Customer

ConsumersEnergy: LowIncome vs.

AverageResidential

Peak

Red

uctio

n

Average customer response

Note: For the PepcoDC pilot, the average residential response excludes low income customers that qualify for the RAD program


24

Of course, dynamic pricing requires smart meters

33% of the nation’s 114 million households are already on smart meters

50% are expected to be on smart meters in another five years

100% may be on smart meters ten years out Progress is inevitable; the best that some

can hope to do is to delay it. This anti-smart meter video has 1.7 million hits

http://www.youtube.com/watch?v=8JNFr_j6kdI


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The best solution is to provide rate choices but anchor those choices on dynamic pricing

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Risk (Variance in

Price)

Reward (Discount from Flat

Rate)

10%

5%

10.5Flat Rate

RTP

CPP

VPP

Inclining Block Rate

Seasonal Rate

TOU

Less Risk, Lower

Reward

More Risk, Higher Reward

Super Peak TOU

PTR

Potential Reward

(Discount from Flat

Rate)

Increasin

g Reward

Increasing Risk


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Dynamic pricing is expected to play a significant role in the future – survey of 50 experts


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The Sun also Rises

ComEd and Ameren have enrolled about 25,000 customers on RTP in Illinois and a new state law calls for opt-in PTR to offered statewide

PG&E has enrolled 60,000 customers on CPP This summer, SDG&E is offering PTR on an opt-out basis and

SCE is offering PTR on an opt-in basis OG&E has begun rolling out VPP and hopes to sign up 20% of

its customers over the next 3 years BGE and PHI will be offering PTR to two million customers over

the next few years in Delaware, Maryland and the District of Columbia

PJM is allowing price-responsive demand to be bid into its multi-state markets


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The biggest opportunity may lie in Texas, where the mass market represents 50% of peak demand


Customer class breakdown is for competitive choice areas; percentages are extrapolated for munis and co-ops to achieve region-wide estimate

Large C&I are IDR Meter Required (>700kW)

Large C&I23.7%

Residential51.2%

(~35,000 MW)

Residential 27.4% (~8,500 MW) Small Commercial

25.2%

Small Commercial 28.9%

Large C&I 43.7%

Wed., Aug. 3, 20115:00 PMERCOT Load: 68,416 MWTemperature in Dallas: 109°

WednesdayMarch 9, 20115:15 PMERCOT Load: 31,262 MW

Source: ERCOT

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The best way to predict the future is to create it –Peter Drucker

Pilot Dynamic Pricing

AMI Business

CaseDeploy AMI

Opt-inRate

Opt-outRate

Conduct Measurement

and Verification

Leave Flat Rate Unchanged

Change Flat Rate

Offer Two-Part Rate

Offer Single-Part Rate

Provide Shadow Bills

Don’t Provide Shadow Bills

Set First Part Equal to Historic Load

Shape

Customer Buys First Part as a Forward

Market Transaction

Offer Bill Protection

Don’t Offer Bill Protection

Understand Customer

Preferences

Segment the Market

Create Segment-Specific

Messages

Get the Word Out

Educate and Answer

Questions

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Source documents (Dynamic pricing bibliography available on request)

Federal Energy Regulatory Commission staff. A National Assessment of Demand Response Potential. June 2009. http://www.ferc.gov/legal/staff-reports/06-09-demand-response.pdf

Faruqui, Ahmad, Ryan Hledik and Jennifer Palmer, Time-Varying and Dynamic Rate Design, Regulatory Assistance Project, July 2012. http://www.raponline.org/topic/global-power-best-practice-series.

Faruqui, Ahmad and Doug Mitarotonda, “Energy Efficiency and Demand Response in 2020: A Survey of Expert Opinion,” The Brattle Group, November 2011. http://www.brattle.com/_documents/UploadLibrary/Upload990.pdf

Faruqui, Ahmad and Jenny Palmer, “The Discovery of Price Responsiveness – A Survey of Experiments Involving Dynamic Pricing of Electricity,” EDI Quarterly, April 2012, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2020587

Faruqui, Ahmad and Jenny Palmer, “Dynamic Pricing and its Discontents,” Regulation, Fall 2011. http://www.cato.org/pubs/regulation/regv34n3/regv34n3-5.pdf

Faruqui, Ahmad and J. Robert Malko, “The Residential Demand for Electricity by Time-of-Use: A survey of twelve experiments with peak load pricing,” Energy: The International Journal, Volume 8, Issue 10, October 1983, pp. 781-795.

Schwartz, Judith, “The Clash of the Dynamic Pricing Titans,” University Club, San Francisco, February 17, 2011, http://vimeo.com/20206833

Wood, Lisa and Ahmad Faruqui, “Dynamic Pricing and Low-Income Customers: Correcting misconceptions about load-management programs,” Public Utilities Fortnightly, November 2010, pp. 60-64. http://www.fortnightly.com/archive/puf_archive_1110.cfm


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Biography – Ahmad Faruqui

Ahmad Faruqui, Ph. D. PrincipalThe Brattle GroupSan Francisco, [email protected]

Ahmad Faruqui is a principal with The Brattle Group who specializes in the analysis, design and evaluation ofsmart grid strategies involving the consumer. He has consulted with more than 50 utilities and transmissionsystem operators around the globe and testified or appeared before a dozen state and provincial commissionsand legislative bodies in the United States and Canada. He has also advised the Alberta Utilities Commission,the Edison Electric Institute, the Electric Power Research Institute, the Federal Energy RegulatoryCommission, the Institute for Electric Efficiency, the Ontario Energy Board, the Saudi Electricity and Co-Generation Regulatory Authority, and the World Bank. His work has been cited in publications such as TheEconomist, The New York Times, and USA Today and he has appeared on Fox News and National PublicRadio. The author, co-author or editor of four books and more than 150 articles, papers and reports on efficientenergy use, he holds a Ph.D. in economics and an M.A. in agricultural economics from The University ofCalifornia at Davis, where he was a Regents Fellow, and B.A. and M.A. degrees in economics from TheUniversity of Karachi with the highest honors.

The views expressed in this presentation are strictly those of the presenter(s) and do not necessarily state or reflect the views of The Brattle Group, Inc.


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Shaping our Energy Future through Dynamic Pricing · Shaping our Energy Future through Dynamic Pricing Ahmad Faruqui, Ph.D. Smart Grid Educational Series IBM Innovation Center Foster