Dynamic pricing and the ‘yo mama’ test
Okay, so the name of the test is actually "my mama," but it could be "yo mama," because both our mamas could be involved in this test.
David Eggart, program manager for the Energy Select program at Gulf Power Company, a subsidiary of investor-owned Southern Company with about 430,000 electricity customers in northwest Florida, introduced the concept yesterday at the last session I attended at the Itron Users Conference in Orlando, Florida.
And Eggart’s concept registered with me because I use the same test in my work. If my mama doesn’t understand my articles, or your mama doesn’t understand the dynamic pricing program at Gulf Power, we haven’t done our jobs properly.
So, I’ll keep it simple. Historically, Gulf Power was faced with too much demand at peak hours of the day.
"Peak power was killing us," in Eggart’s words. "We had to shave the peak and fill the valleys."
That was in the 1970s, when the utility used direct load control on heating/air conditioning systems and pool pumps, etc. And because "customers make decisions based on the value proposition," Gulf Power kept looking for better demand response solutions.
Fast forward to 1993 when the utility did a pilot program to test dynamic pricing as the means to shave peak and fill valleys.
"Who are your competitors?" Eggart asked rhetorically. "It’s the family budget and your family time. We all [in the utility business] tend to get deep on this when it’s fairly simple."
Gulf Power decided it would develop a system with four rates and provide a thermostat-controlled, residential time-of-use program.
"You have to create things that customers will buy into and participate in," Eggart intoned. "If the consumer can see the value, they don’t need to understand kilowatt hours. You apply the ‘my mama’ test."
So Gulf Power offered opt-in customers the option of buying a smart thermostat (capable of receiving price signals from the meter), which could be programmed to respond to four rates. (And major appliances could be set to cycle down or not operate during high price periods.) While the standard residential rate was 11.3 cents, those choosing dynamic pricing could get a low rate at 9.2 cents per kilowatt hour, medium rate at 10.4 cents, high rate at 15 cents and a critical peak price of 35.9 cents.
The utility scheduled the low, medium and high rates at set times and reserved the right to send a price signal that critical peak pricing was forthcoming on rare days for up to two hours. Those who opted into the so-called RSVP program paid $4.95 a month (a "participation charge") to be involved because, as Eggart put it, "if you’ve got skin in the game, you’re going to actively engage."
The Florida Energy and Conservation Act of 1980 included an Energy Conservation Cost Recovery Clause (ECCR) if such programs proved cost effective at, in this case, reducing the cost of delivering peak power by avoiding new generation sources.
The four demand side management (DSM) strategies reflected in this effort were, in Eggart’s telling, energy efficiency, peak load reduction, load shifting and load building. Those strategies helped reduce generation needs, put existing capacity to better use and enhanced customer satisfaction. Two results included a reduction in spinning reserves and wholesale energy purchases.
On a practical level, Gulf Power’s customers exhibited a high tolerance for small changes in room temperature during summertime peaks when a higher thermostat setting would avoid the critical peak rates, but low tolerance for awakening to find insufficient hot water for a shower before heading out for the day.
Eggart showed graphs to illustrate how very small reductions in individual use across a modest service territory produced meaningful gains for the utility in peak load reduction and associated benefits.
"This isn’t about the future," Eggart said with evident satisfaction. "This is about what we’ve done."
Further, Eggart showed the results of customer surveys that not only were customers satisfied with the program itself, but that satisfaction made them feel significantly better about their utility as well.
As for the actual level of savings in dollar terms, those were modest, Eggart acknowledged, perhaps amounting to 15 percent per year. But customers perceived their savings as more significant than that and Gulf Power didn’t present them with dollar figures for their savings.
Obviously one size doesn’t fit all and perhaps only comparably sized utilities could take this route. But no one mentioned smart meters at all. And Eggart offered a method for demand response that put choices in the hands of consumers, who sensed value for the taking. And even yo mama, or mine, could understand it.
Intelligent Utility Daily