The future of innovative pricing programs


Conference: Smart Metering West Coast 2006
Location: San Fransisco
Presenter: Ahmad Faraqui
Abstract:Presented by Ahmad Faraqui at Smart Metering West Coast 2006. The energy crisis in California brought out the salience of demand response in preventing and managing price spikes, restoring balance in wholesale markets and protecting customers from price volatility.
Arguably the most efficient way of introducing demand response is through dynamic pricing designs such as time-of-use rates, critical-peak pricing and real-time pricing.  A number of states in the US and provinces in other countries such as Australia and Canada have begun to examine the merits of innovative pricing in earnest.  Additional impetus is provided by the Energy Policy Act of 2005, which argues that current pricing practices result in over-consumption of electricity during peak periods.

While important strides have been taken in improving the practice of dynamic pricing during the past five years, there is a still a big gap between theory and practice.  On the one hand, there is the example of utilities in California that, encouraged by a progressive state regulatory environment, are poised to begin offering dynamic pricing options over the next five years to all their customers, including residential and small commercial and industrial customers.  On the other hand, there are several other states where nothing, absolutely nothing, is happening. 

Every possible argument about why dynamic pricing should not be offered is being put forward by its opponents, including the inconvenience it would cause customers, the expenses associated with smart metering, the low level of demand response it would evoke and the low level of utility costs it would avoid.  And, of course, proponents of dynamic pricing are talking about how much it would lower power costs, how it would lower customer bills and how it would improve the environment. 

The future of dynamic pricing will be determined as to which group prevails in the final analysis. The primary barriers are likely to be legal and political, not economic or technological. This presentation will lay out alternative futures that bound the possibilities. It will estimate likely impacts on customer peak demand, power costs and customer bills if dynamic pricing is implemented on a nationwide basis in the US, along the lines of the California scenario.  It will also estimate likely impacts that would occur in a pessimistic scenario where little progress takes place.