Dynamic pricing can play a substantial role in demand response


Ahmad Faruqui,
Brattle Group
San Francisco, CA, U.S.A. — (METERING.COM) — May 23, 2008 – With the potential to reduce U.S. peak demand by 11 percent by 2030, dynamic pricing can play a substantial role in meeting the demand response goals of utilities, states, and regional transmission organizations across the nation, according to a new study by the Brattle Group.

Based on a review of the fourteen most recent pricing experiments with dynamic pricing in the U.S., Canada, France and Australia, the review finds that, on average, customers respond to higher prices by lowering usage. The magnitude of price response depends on several factors, such as the magnitude of the price increase, the presence of central air conditioning and the availability of enabling technologies such as two-way communicating thermostats and gateway systems.

For the average customer, time-of-use (TOU) rates are likely to induce a drop in peak usage of approximately 5 percent. When TOU rates are paired with enabling technologies, peak load reductions reach to 25 percent on average. Similarly complementing a TOU rate design with a critical peak pricing (CPP) component increases the program effectiveness and leads to peak load reductions in the order of 20 percent on CPP event days. However, the largest peak load reductions can be attributed to CPP programs with enabling technologies, with reductions of 30 percent on average on CPP days.

These observations reveal that the residential dynamic pricing designs can be effective demand side resources in reducing peak electrical consumption. This has essential implications for the reliability and least cost operation of an electric power system facing ever increasing demand for power and surging capacity costs. A demand response program that blends together the customer education initiatives, enabling technology investments, and carefully designed time-varying rates can achieve demand impacts that can alleviate the pressure on the power system.

The review is presented in the publication “The power of experimentation: New evidence on residential demand response,” which was authored by Brattle Group economists Ahmad Faruqui and Sanem Sergici.

“Dynamic pricing” refers to pricing signals that are triggered based on actual wholesale market prices and not set in advance. In the case of CPP, although the rate may be set in advance, the critical days are called based on wholesale market conditions.