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Pricing: Static to Dynamic A Brief Framework Pacific Northwest Demand Response Program Rick Weston 5 December 2008 Outline Overview of pricing Survey of current mass market price structures Some questions Moving along the Continuum from Static to Dynamic Customers’ Perspective

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Pricing static to dynamic a brief framework l.jpg

Pricing: Static to DynamicA Brief Framework

Pacific Northwest Demand Response Program

Rick Weston

5 December 2008


Outline l.jpg


  • Overview of pricing

  • Survey of current mass market price structures

  • Some questions

Moving along the continuum from static to dynamic l.jpg

Moving along the Continuum from Static to Dynamic

Customers’ Perspective

System’s Perspective


Lower energy and capacity costs

Reduced air emissions

Align marginal rates with long-run marginal costs

Promotes efficient fuel choices

Elasticity effect produces energy savings

Tailblock price improves cost-effectiveness of energy efficiency, encourages participation in DSM programs


AMI hardware and software costs

Customer recruitment and maintenance costs

  • Benefits

    • Bill savings

    • Recruitment or participation incentives

    • Enhanced awareness about energy usage

    • Better control of energy costs

    • Improved air quality

    • Faster power restoration after an outage

  • Costs

    • Cost of metering

    • Loss of privacy

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Example: Residential Inverted Block Rate

  • Tail block usage is space-conditioning and / or discretionary.

  • Set initial block at low enough level so most customers see tail block.

  • Inverted only in seasons of peak demands.

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Pacific Power, Washington

Customer Charge: $6.00

First 600 kWh:$.04914

Over 600 kWh: $.07751

Schedule 16, Oct. 9, 2008

Arizona Public Service Company, Arizona

Customer Charge: $7.59


First 400 kWh$.08570

Next 400 kWh$.12175

Over 800 kWh $.14427


All kWh$.08327

Schedule E-12, July 1, 2007

Examples of Inverted Rates

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Load-Factor Based

Different end-uses have different load factors:

Resource-Cost Based

Different resources have different fully-allocated costs

Older Baseload:$0.04

Newer Baseload:$0.08


Cost Bases of Inverted Rates

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Example: Critical PeakTime-of-Use Pricing

  • Flat or TOU rate during all “normal” hours.

  • Defined or Market price effective when market price exceeds defined threshold.

  • Customers get notice when Critical Peak rate is in effect.

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Control Group

Participation Incentive

Critical Peak Rate

CA Pilot: Residential Load Impacts(Incentives)

Residential Response with Automation:

Participation Incentive vs. Critical Peak Rate


CPP Event
















Hot Day, August 15, 2003, Average Peak Temperature 88.50

Source: Levy Associates, October 2005

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Example: Real-Time Pricing Options for Large C&I Customers

  • Georgia Power: Baseline-referenced RTP; customers see market price at margin.

  • PSE&G: Customers see market price for all consumption.

  • If both offered, customer chooses.

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Current Residential Rate Structures: Selected Utilities

Pacificorp l.jpg


  • Residential Service, Oregon

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Idaho Power

  • Residential Service, Idaho

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Idaho Power

  • Res. CPP Service, Emmett Valley, Idaho

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Avista Power

  • Residential Service, Idaho

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Avista Power

  • Residential Service, Washington

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Tuscon Electric Power

  • Residential Service, Arizona

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Southern California Edison

  • Residential Service, California

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San Diego Gas and Electric

  • Residential Service, California

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  • Residential Service, Iowa

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Xcel Energy

  • Residential Service, Minnesota

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Xcel Energy

  • Optional TOU Res. Service, Minnesota

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Rate design determines who’s bearing price volatility risk

  • From one extreme

    • Flat $/kWh price in all hours

      • Volatility of wholesale price in the short run is borne by the supplier; presumably a premium for holding that risk (i.e., hedging it for the consumer) is included in the price

  • To the other

    • Real-time price in all hours

      • The wholesale price is passed through to the customer in every hour; the customer bears the risk entirely

  • And everything in between

    • Seasonally differentiated, time-of-use, critical peak, and other pricing

      • The volatility risk is shared in varying degrees by customer and supplier

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  • What is the size of the demand-response resource associated with TOU, CPP, and other more dynamic pricing options?

  • What actions should be taken to answer this question?

    • Rate design dockets

    • Pilots such at the California critical peak pricing pilot

      • Are the lessons from other jurisdictions applicable here?

  • What effect does implementation of CPP and other time-sensitive pricing have on the procurement and provision of default service?

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    Policy Issues

    • Overall cost-effectiveness and AMI cost-recovery

    • Addressing multiple perspectives

      • Equity: There will be winners and losers; the program may look attractive for some and unattractive for others

        • Are economically more efficient rates in fact more equitable?

      • Impacts on low-income customers

        • Ability to respond to price signals, regulatory protections?

      • Revenue neutrality under the new rate designs

        • Default service: adjustments for changed load profiles of responding customers

        • Distribution service: impacts of conservation differ from those of load-shifting

    • Deciding on deployment strategy

      • Voluntary

        • Opt-in or opt-out

      • Mandatory

    • Customer concerns about rate hikes and price instability

    • Relationship to energy efficiency and other clean energy programs

      • Dynamic pricing complements energy efficiency, but isn’t a substitute for it

      • How to allocate scarce investment dollars between efficiency and smart grid infrastructure?

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