Proposed approach on dynamic pricing in Australia best way forward


Ahmad Faruqui,
Principal, Brattle
Melbourne, Australia and San Francisco, CA, U.S.A. — (METERING.COM) — October 8, 2012 – The approach proposed by the Australian Energy Market Commission (AEMC) for dynamic pricing is probably the best way forward, according to Ahmad Faruqui in a recent study for the Commission.

This includes an opt-in for vulnerable consumers, mandatory participation for consumers above a certain size, and opt-out for all other consumers – and if they do opt out, they can pick a new flat rate which reflects the full cost of hedging.

The report forms part of the AEMC’s Power of Choice draft report on increasing demand side participation in Australia’s energy market. It discusses ways of managing the benefits and costs of dynamic pricing in Australia, specifically focusing on real time prices, time-of-use rates, critical peak pricing, and peak time rebates.

Key issues reviewed in the report include opt-in versus opt-out, and vulnerable customers.

Opt-in participation rates tend to be quite low. For example, in the U.S. the rate is 1 percent for time varying rates and 1 percent of that 1 percent for dynamic pricing rates. However, if the hedging premium that is embedded in flat rates is removed from the dynamic pricing rate, higher participation rates can be expected. In Arizona, for example, time varying rates have been selected by 51 percent of the customers for one utility and by 29 percent for another.

If dynamic pricing is offered on an opt-out basis, the societal benefits will be maximized but some customers may see higher bills.

There is particular concern about the risk of high bills to vulnerable customers under dynamic pricing. In Australia over 30 percent of the population aged 15 and over is eligible for electricity bill support. The most likely risk event is temperature shocks.

Three specific ways that vulnerable consumers can be protected can be identified: (1) given their extenuating circumstances, they can be excluded from dynamic pricing; (2) they can pay the lower of the two bills – what they would have paid had they stayed on a flat rate, or the one they would pay on a dynamic pricing rate; or (3) they would be allowed to buy their minimum energy needs on a flat rate and buy additional electricity on a dynamic pricing rate.

“While most people agree that dynamic pricing will improve grid utilization and lower power costs for all consumers, there are concerns that it will adversely affect vulnerable consumers,” commented lead author, Brattle principal Ahmad Faruqui.