Pricing Enabled by AMI What Types? What are the Benefits?

1. Pricing Enabled by AMI What Types? What are the Benefits? Dr. Steven D. BraithwaitChristensen Associates Energy Consulting EUCI Webinar September 12, 2006

2. Christensen Associates Energy Consulting • Economic and engineering consulting for electric utility industry for 30 years • 1980s – Evaluation of TOU pricing • 1990s – Design and evaluation of RTP • 2000s – Market-based cost-of-service and rate design; measuring customer price response; assessing benefits of CPP, RTP, DR

3. Background:Brief History of Time-based Pricing • 1970s: NARUC encouraged study of marginal cost-based TOU pricing. Conclusions and outcomes: • Residential consumers responded to TOU prices • Business case for TOU – marginal due to metering costs • TOU pricing implemented widely for large customers • 2005: EPAct encouraged states to review time-based pricing and demand response • Price responsive demand needed for efficient wholesale market operations • New positive business case for advanced metering • What are implications for time-based pricing?

4. Background:Brief History of Time-based Pricing (2) • 2006: FERC report on DR and AMI – based on new survey of utilities • AMI market share – 6% of electric meters in U.S. • Pennsylvania: 52% • Wisconsin: 40% • Time-based pricing & DR: 5% of customers (most common – direct load control) • DR capacity by NERC region: 3 – 7% of summer peak (majority is likely interruptible service or emergency programs)

5. Background:The Need for Price-responsive Demand • Existing energy market inefficiencies: • Varying hourly marginal costs – many low-cost hours; few very high-cost hours (e.g., 1 – 2%) • Fixed retail prices • Result in: • Non-responsive electricity demand • Extra generation capacity and higher-than-necessary costs to meet non-responsive demand

6. How to Improve Economic Efficiency? • Dynamic pricing that reflects market costs: • All the time:Real-time pricing • When most important:Critical peak pricing, Day-type TOU • Demand response (DR) programs – payments for load reductions when reliability endangered or market cost is high: • Interruptible/Curtailable service • Buy-back programs • ISO DR programs (PJM, NYISO, ISO-NE) • Peak reductions and load shifting from high-cost to low-cost hours produce cost-saving benefits

7. Examples of Dynamic Pricing(Dispatchable pricing that reflects market conditions) • Large customers: RTP • Georgia Power (2,500 customers, 80% of C&I load) • Duke Power (50 – 100 very large customers) • Competitive retail providers (NY, NJ, Texas) • Residential customers: • Gulf Power – permanent CPP (GoodCents Select) • CPP pilots – CA, NJ, MO, Idaho, DC • RTP pilot in Chicago • Critical-day rebate pilot – Anaheim, CA • Day-type TOU – EdF (France)

8. Common Technology Features to Support Dynamic Pricing and DR • Metering to record hourly (or TOU) usage • Communicate price changes • Provide customer access to usage information • Control devices to facilitate load responseCommunication & control devices increase price response, but are more costly

9. Economic Benefits from Price-Responsive Demand • Fundamental source of economic benefits: • Cost savings from load reductions at high prices • Load reductions replace the need for a comparable amount of peaking capacity (see M. Reeder, Elect. Jl., July ’06) • Expanded net value from increased usage at low prices • Factors that affect amount of benefits: • Price variability (greater benefits with more high-price & low-price opportunities) • Customer price responsiveness (achieving benefits requires customers to modify usage)

10. Summary of Findings on Customer Price Responsiveness • Customers on average respond to prices, in reasonably consistent ways (TOU, CPP & RTP price elasticities) • A minority of customers (10 – 20%) appear to respond much more than average • Many consumers appear unresponsive to modest prices • Some consistent indicators of most responsive customers • Energy-intensive industrials • Enabling technology • Easy product storage – rock crushing, water utilities • Automated controls

11. Price-Responsive C&I TOU CustomersPercent by Size and Business Type

12. Quantitative Estimates of DR BenefitsBased on evaluation of dynamic pricing potential • Typical net benefits small relative to total bill • 0.5 – 2% of consumers’ original bills • Analogous to productivity increase • Note that consumers incur costs to respond – benefits are net of these costs • Residential customer: $10 – 50 / year • Industrial customer (5 MW): $20,000+ • System (10,000 MW): $50 million

13. DR Benefits vs. Metering Costs • If metering costs must be justified by DR benefits alone: • Dynamic pricing for medium to large customers can be justified relatively easily • More difficult business case for mass-market • If business case for AMI can be made on operational savings and other benefits: • Much lower hurdle for dynamic pricing • Benefits from DR can help support a marginal business case

14. Illustrations of Dynamic Pricing • CPP compared to traditional TOU • RTP with financial hedge for risk management • Regulated utility • Competitive provider in restructured states

15. CPP/TOU Rate DesignWeekday price profile $0.5 Critical price 0.4 TOU Peak Price 0.3 Peak price w/ CPP Standard Rate Mid-peak 0.2 0.1 Off-peak 0 1 8 14 18 20 24

16. Real-time Pricing (RTP) • Hourly prices – Day-ahead, hour-ahead, real-time • Prices reflect marginal cost of energy and reserves (wholesale energy prices/LMP) • Most successful form – two linked contracts • Hourly pricing for all usage, plus • Financial contract-for-differences – guarantees fixed price for fixed contract quantity • Success story at regulated utility – Georgia Power Company

17. Example of RTP with Hedging in Competitive Retail Energy Markets • Constellation NewEnergy has 6,000 MW of large customer load on similar RTP products • Customers face hourly prices indexed to RTO day-ahead or real-time prices (e.g., PJM, ERCOT) • Customer selects amount of load to be covered by fixed-price contracts (typically less than expected usage) • Balancing loads (above and below contract level) are settled at indexed prices • Consumers have incentive to respond to hourly prices, but manage their price risk • Natural pricing product for a commodity with price volatility and forward markets

18. RTP with Financial Hedge: Fixed hourly load (KB) billed at fixed price PB Price Demand Fixed price can be TOU peak and off-peak, with values set by forward power contracts. PB Base bill kWh KB

19. Added Customer Value at Low RTP Prices Price Demand Added net value from load increase PB PRTP Bill for incremental usage Base bill low KB kWh KA

20. High RTP Price: Bill Increase for Usage Beyond Contract Quantity If No Response Demand Price Potential bill for normal usage beyond KB PRTP PB Base bill norm KB kWh KA

21. Benefit from Load Response at High RTP Price: Bill savings > Curtailment cost Demand Price Net benefit from load reduction PRTP Curtailment cost Total bill savings – full rectangle PB Base bill norm KB kWh KA

22. Conclusions • Dynamic pricing can improve market efficiency and provide cost-saving benefits • Benefits may be shared by consumers and providers (through margins or premiums) • Potential benefits from dynamic pricing can enhance the business case for AMI • If the business case for AMI can be made without DR, then the cost barriers to dynamic pricing are reduced substantially

23. Contact Information Steven Braithwait SDBraithwait@caenergy.com 608-231-2266