Dynamic pricing could save $35 billion in electricity costs


Ahmad Faruqui,
Brattle Group
Cambridge, MA, U.S.A. — (METERING.COM) — May 17, 2007 – A new review shows that demand response programs based on advanced metering and dynamic pricing could reduce peak load in the United States by at least 5% over the next few years, with a value of $35 billion over the next 20 years.

The review paper, entitled “The Power of Five Percent: How Dynamic Pricing Can Save $35 Billion in Electricity Costs” by Ahmad Faruqui, Ryan Hledik, Sam Newell, and Johannes Pfeifenberger of the Brattle Group, says that the potential impact of demand response is large and significant. Using the best available technologies, the national peak demand reduction potential is as much as 22.9 percent, while a cost-effective mix of technologies could lower peak demand by 11.5 percent. However, based on realistically achievable penetration rates the market potential of demand response is estimated at 5 percent, which in turn translates into savings in generation, transmission and distribution costs of $3 billion per year.

The paper points out that a prerequisite to the provision of dynamic pricing is the installation of advanced metering infrastructure (AMI). Assuming an approximate cost of $200 per meter, which is at the upper end of expert opinion, the investment to install AMI throughout the U.S. is estimated at $26 billion. However, if 50 to 80 percent of these costs are recovered through operational benefits, the remaining cost of AMI is between $5.2 and 13 billion. Thus, the net costs of AMI that would need to be recovered through demand response benefits are only 15 to 37 percent of the $35 billion in long-run benefits. This makes AMI a highly cost-effective investment from a national perspective, says the paper.

Demand response is likely to have other benefits as well, the paper notes. These would include more competitive energy and capacity markets, reduced price volatility, the provision of insurance against extreme events that have not been captured in long-term resource planning scenarios, fewer environmental emissions during peak periods, improved system reliability resulting in fewer blackouts and brownouts, and AMI-based enhanced levels of customer service.

Some additional costs would also be incurred as utilities change their billing systems and institute mechanisms for communicating the dynamic price signals to customers. All of these variables will need to be factored in and quantified in the final decision to move ahead with demand response.