Benefits of dynamic electric pricing quantified


Ahmad Faruqui,
Principal, The
Brattle Group
San Francisco, CA, U.S.A. — (METERING.COM) — February 21, 2008 – Properly designed dynamic electricity pricing rates can yield substantial benefits to utilities and customers, with potential demand reductions of between 8 to 50 percent during critical peak periods, according to a new review by the Brattle Group.

The paper, entitled “Quantifying the Benefits of Dynamic Pricing in the Mass Market,” uses a suite of models called the Pricing Impact Simulation Model (PRISM), which extends a model that was derived from the experimental data collected in the 2003-2005 California Statewide Pricing Pilot (SPP), to quantify the benefits of dynamic pricing for the residential and small business market.

The suite comprises two components, impacts and benefits. Inputs to the impacts model include existing and dynamic pricing rates and utility specific weather data, load shapes and central air conditioning saturations, and outputs the customer-level demand response including the customer bill savings. This customer-level demand response along with a forecast of customer participation rates and estimated capacity, energy and transmission and distribution costs input into the benefits model, which outputs the utility benefits in terms of avoided costs and reduced wholesale market prices.

As an example a scenario is modeled comparing peak-time rebate (PTR) and a variety of critical peak pricing (CPP) rate options with a time-of-use (TOU) rate, demonstrating average monthly bill savings ranging up to almost $13 on PTR and more than $14 on CPP rates compared with $7 on a TOU rate in peak periods. In off-peak periods, however, the savings on TOU exceeded those on the dynamic rates.

The paper comments that the purpose of dynamic pricing is to provide customers with more accurate price signals and thereby help the utility avoid costly generation, wholesale market purchases, and/or hedges. Dynamic pricing is receiving increasing attention in the industry today because it holds the potential for significantly improving the efficiency of electricity markets in both restructured and non-restructured states. However, ultimately its widespread use, and that of AMI which is required for its provision, will require that the net benefits of such an investment are positive.

The paper also points out that if the objective of dynamic pricing is to achieve demand response, then other ways for achieving demand response should also be considered. Principal among these are direct load control programs and TOU rates, with neither requiring AMI for their implementation to achieve. While the benefits achieved by these alternatives may not be as high as the benefits achieved by dynamic pricing, the costs of implementation may be significantly lower.

Commenting on the study, Brattle Group principal and lead author Ahmad Faruqui says that based on the large body of experimental evidence with dynamic pricing a 20 percent demand reduction is a reasonable median that utilities can expect.

The paper was sponsored by the Edison Electric Institute and presented at the annual winter meeting of the National Association of Regulatory Utility Commissioners (NARUC).

While PRISM was developed in California the basic model can be adapted can be adapted to conditions elsewhere through adjustments for climatic, sociodemographic, rate and load shape characteristics.