As the industry continues to debate just how to make the smart grid a reality, dynamic pricing programs are receiving increased interest from state commissions and utilities as an important piece to the puzzle. This is driven in large part by an issue the vast majority of utilities across the world have long faced – the fact that the cost of generating electricity does not always match the price the end user pays for that electricity. This is highlighted by recent Brattle Group study that shows how costs are not always equally/fairly distributed. To explain, the study found that consumers on a flat rate pricing plan that don’t consume much energy during peak hours, are likely subsidizing heavy peak users to the tune of US$3 billion a year. Collectively, these consumers may be overpaying for electricity by about US$7 billion a year (using the FERC Staff estimate of 92 GW saved under universal dynamic pricing and valuing demand response at US$75/kW-year). Dynamic pricing programs have the ability to solve this issue by enhancing the economic efficiency of energy usage and reducing peak demand, which also limits the need for expensive peaking capacity.
Yet there are several kinds of dynamic pricing programs. To best understand the real-world benefits of each, it is important to understand how they operate:
Real-Time Pricing (RTP)
Real-time pricing enables customers to pay for electricity at wholesale cost during a predetermined interval and is usually targeted at commercial & industrial (C+I) customers who use large amounts of energy. In such a program, a utility will provide prices in advance (usually a day or an hour ahead of the event) and a customer may commit to either reducing an entire load or a portion of that load. This is often viewed as the purest form of dynamic pricing as the much smaller price responsive interval periods lead to a closely linked cost/price ratio.
Critical Peak Pricing (CPP)
Critical peak pricing (CPP) incentivizes users to lower energy usage during peak periods, when electricity is at its most expensive. This provides an opportunity for customers to reduce their electricity bills by choosing to use less energy. CPP is a dynamic rate that it is dispatched by the utility based on real-time capacity conditions. It is one of the most effective approaches to substantively reducing peak demand as I will discuss later on when reviewing results from programs Comverge customers.
Time-of-Use (TOU) Pricing
Time-of-use (TOU) programs reflect the higher cost of supply during peak periods, as well as the lower cost during off-peak periods. TOU rates are not widely considered dynamic because they are fixed and not based on actual market conditions. For example, a peak period might be defined as the period from 11:00 a.m. to 5:00 p.m. on weekdays, with the remaining hours defined as off-peak. However, there is certainty as to what the rates will be and when they will occur during these intervals. In other words, these rates are independent of the system conditions and are dispatchable only by the utility. This differentiates TOU from the other dynamic pricing programs but as I will discuss later these programs are still tremendously effective in lowering peak loads and reducing the need for peaking capacity.
Peak-Time Rebate (PTR)
Peak Time Rebate (PTR) programs allow customers to earn a rebate by reducing energy use during hours of peak demand. Rebate payments are based on the amount of load reduction as compared to a calculated baseline usage level. The number of days when the program is available is typically capped for a calendar year.
What to Know When Executing a Dynamic Pricing Program
No matter what type of dynamic pricing program a utility decides to roll out, there are certain technologies and best practices required to make them successful. At the core of any dynamic pricing program is a demand response management system (DRMS). This enables utilities to send customers real-time or day-ahead price signals to a variety of endpoints, including Web portals, programmable controllable thermostats, smart thermostats, in-home displays (IHD), or mobile devices, such as an iPhone.
With these endpoints, customers can manage energy use by changing the settings of almost any appliance, including air conditioners, heating systems, washers and dryers, pool pumps, and water heaters. Typically, dynamic pricing uses either advanced metering infrastructure (AMI) or existing broadband networks to provide fast, reliable two-way exchange of communications between the customer and utility. This two-way exchange, enabled by a DRMS, allows utilities to aggregate all adjustments to a participant’s control schedules and offers advanced insight into the capacity made available by all program participants.
With these programs, utilities can maximize the benefits by increasing participation among users. Because dynamic pricing programs are a relatively new concept to energy consumers, utilities are still developing the best marketing approaches to drive program participation. To ensure maximum program participation, the marketing function should include prospect analysis, segmentation, marketing implementation, recruitment, qualification, and enrollment. Ongoing support for program management, administration, field service and installation management, customer support and investment is also important to driving mass-scale adoption.
The program needs to be measured to ensure success. As a result, it is vital that utilities have access to tools that monitor and ensure event performance through measurement and verification (M&V) data, which allows them to evaluate device usage, forecast futures based on past event participation, and ensure ongoing performance. Additional tools for assessing system and network performance – e.g. load and event analysis, forecasting and customer analysis, and class/type segmentation – will provide the necessary analysis for further system optimization.
Customer Successes
It’s clear that in theory, dynamic pricing programs have the potential to increase customer engagement and build more meaningful relationships. But how do they really work in practice? Below are two real-world examples from Comverge customers that have implemented dynamic pricing programs that are driving meaningful results:
Gulf Power
Based in Pensacola, FL, Gulf Power is an electric utility that provides services to more than 430,000 customers in Northwest Florida. Gulf Power’s commitment to providing its customers with reliable and affordable energy, while minimizing any environmental impact, has earned the company national recognition as a leader in energy efficiency. For the last 12 years the pioneering Gulf Power Energy Select TOU-CPP program, which at almost 10,000 participants is currently the largest automated residential dynamic pricing program in the country, has resulted in customer satisfaction rates of 90 percent and delivered environmental benefits by enabling Gulf Power to lower peak demand, therefore deferring the need to build additional generating facilities.
The Gulf Power Energy Select program gives customers greater control over their energy usage by enabling them to pre-program their central cooling and heating system, electric water heaters, and pool pumps to automatically respond to pricing tiers and price signals. This “set it and forget it” capability makes it easy for customers to participate and also provides a more predictable load drop. The system bypasses the traditional AMI used for dynamic pricing programs to use the customer’s existing broadband network and a ZigBee gateway to enable a two-way exchange of information. The program has provided Gulf Power with a highly reliable source of capacity while enabling participants to pay a lower price for electricity approximately 87 percent of the time.
Tampa Electric Company
Based in Tampa, FL, Tampa Electric Company provides service to approximately 672,000 residential and C&I customers over 2,000 square miles of Florida. Inspired by the success of the Gulf Power Energy Select program, Tampa Electric Company implemented the Energy Planner program, a TOU and CPP program with more than 2,000 participants enrolled. One of the most sophisticated residential dynamic pricing programs in the country, Energy Planner enables residential customers to automate control of their energy usage to reduce consumption during times of peak demand, when electricity rates are at their highest.
Tampa Electric Company deployed a cost-effective TOU and CPP program that bypasses both AMI meter data management (MDM) technologies to use a customers’ existing broadband network and a ZigBee-based home area network (HAN) to collect and analyze data from energy management devices, smart meters and residential gateways.
In particular, the Tampa Electric Company Energy Planner program uses smart thermostats and digital control units (DCUs) to help residential customers control the operation of central heating and cooling systems, electric water heaters, and pool pumps based on dynamic pricing rates. This automated price-responsive program enables Tampa Electric Company to offer four pricing rates for electricity (low, medium, high, and critical) that provide lower rates approximately 87 percent of the time. The critical peak rate can be executed by the energy provider within minutes, and since 2008 they have reliably shed 3.1 kW during winter peak and 2.0 kW during summer peak per customer.
Conclusion
Gulf Power and Tampa Electric Company stand out as two early adopters that have improved customer satisfaction by implementing dynamic pricing programs that lower peak demand and enable customers to save money on their electricity bills. And these programs demonstrate that when implemented appropriately and with automation, they lead to sustainable behavioral changes in energy consumption that result in meaningful and sustainable load drop. Dynamic pricing is critical to the success of the smart grid as it aligns the cost of generating electricity with what users end up paying. While dynamic pricing programs can take many forms, and require proven technology and best practices to implement, utilities need to include them as part of their overall energy efficiency mix to improve the way in which energy is delivered and consumed across the globe.
About the Author
Jason Cigarran is the Vice President, Marketing for Comverge. Prior to joining Comverge, Jason was the Vice President, Investor Relations for Eclipsys Corporation, a healthcare information technology company.
