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Pricing: Static to Dynamic A Brief Framework

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  1. Pricing: Static to DynamicA Brief Framework Pacific Northwest Demand Response Program Rick Weston 5 December 2008 Website: http://www.raponline.org

  2. Outline • Overview of pricing • Survey of current mass market price structures • Some questions

  3. Moving along the Continuum from Static to Dynamic Customers’ Perspective System’s Perspective Benefits 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 Costs 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

  4. 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.

  5. 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 Summer First 400 kWh $.08570 Next 400 kWh $.12175 Over 800 kWh $.14427 Winter All kWh $.08327 Schedule E-12, July 1, 2007 Examples of Inverted Rates

  6. 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 Peakers: $0.12 Cost Bases of Inverted Rates

  7. 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.

  8. Control Group Participation Incentive Critical Peak Rate CA Pilot: Residential Load Impacts(Incentives) Residential Response with Automation: Participation Incentive vs. Critical Peak Rate 5.0 CPP Event 4.5 4.0 3.5 3.0 2.5 kW 2.0 1.5 1.0 0.5 0.0 Noon 2:30 7:30 Midnight Hot Day, August 15, 2003, Average Peak Temperature 88.50 Source: Levy Associates, October 2005

  9. 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.

  10. Current Residential Rate Structures: Selected Utilities

  11. PacifiCorp • Residential Service, Oregon

  12. Idaho Power • Residential Service, Idaho

  13. Idaho Power • Res. CPP Service, Emmett Valley, Idaho

  14. Avista Power • Residential Service, Idaho

  15. Avista Power • Residential Service, Washington

  16. Tuscon Electric Power • Residential Service, Arizona

  17. Southern California Edison • Residential Service, California

  18. San Diego Gas and Electric • Residential Service, California

  19. Alliant • Residential Service, Iowa

  20. Xcel Energy • Residential Service, Minnesota

  21. Xcel Energy • Optional TOU Res. Service, Minnesota

  22. 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

  23. Questions • 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?

  24. 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?