Dynamic pricing now!

AMI investment doesn't add up without it

Phil Carson | Dec 05, 2011


With advanced metering infrastructure (AMI) deployments rapidly proceeding, utilities need to implement dynamic pricing programs, which AMI is designed to enable.

And in the absence of further federal resources devoted to grid modernization—a current, political and economic reality—the cost of many research-and-development opportunities should be borne by the power industry. 

Both these points were made by a panel at The National Press Club yesterday in Washington, D.C., that discussed myriad issues familiar to the industry if not the public and national press.

The panel presented a new report from a team under the auspices of the Massachusetts Institute of Technology, "The Future of the Electric Grid," which offered an assessment of and recommendations for grid modernization. 

You can peruse the report on your own time, as it's nearly 300 pages long. Here I'll treat some remarks from the presentation and the question-and-answer session that followed. Note that many if not most of the issues identified by MIT have been standard fare in our coverage over the past two years in which the study took place.

With the "peakiness" of the load curve increasing—historically with the pervasive spread of air conditioning—anything that can shave or shift the peak to reduce the need for new power plants is a good thing, the panel said.

But the implementation of AMI, which makes price signals possible for dynamic pricing programs, has not been followed by such programs, the panel pointed out. The current impasse offers "an incredible learning opportunity" to discover how dynamic pricing can be made palatable to consumers.

Lisa Wood, executive director of the Institute for Electric Efficiency, asked the panel how the industry could move forward with dynamic pricing programs. (Recall Wood argued for implementations over pilot projects in our Industry Expert column titled, "Time to Move Beyond Pilots.") Currently, only Oklahoma Gas & Electric (OGE) has a substantial number of customers (about 20 percent) on dynamic rates, Wood said, pointing to the commitment of OGE Energy's CEO Peter Delaney, local consumer advocates and the state's public utilities commission.

"If you deploy AMI, it makes no sense to sit on your heels," agreed panelist Nancy Rose, professor of applied economics at MIT.

Due to the risk-averse nature of the power industry and its regulators, Rose said, "baby steps" that follow innovative utilities such as OGE will be crucial, as will the sharing of outcomes from dynamic pricing pilots and constructive engagement of customers.

"Don't conflate resistance to 'smart' meters with resistance to dynamic pricing," Rose added.

I asked the panel, which met in Washington, D.C., through a webcast interface, "To what degree should the recommendations you make be initiated by regulators and to what degree by the market and consumers?"

"The recommendations on transmission planning and cyber security are matters for public policy for the industry," answered Henry "Jake" Jacoby, professor of management emeritus, MIT. "The things that Nancy [Rose] is talking about are things that need to be done largely by the industry itself, with the support they can get from their [state] regulators. Almost everything we've talked about here is a mix of government, regulatory and policy instruments, the entities that run the system and their consultants. It's a mix of everybody."

"One thing that makes our study a little different from many studies of technology that have research implications," added Richard Schmalensee, professor of economics and management at MIT, "is we think that the research that needs to be done ... are not big ticket items. These are not multi-billion dollar items that the DOE [Department of Energy] needs to fund. If in coming years federal research dollars in these areas are constrained, we expect that the things we call for are not beyond the industry's means. They're not a big stretch and thus they probably could be and should be industry funded."

Other ideas espoused by the panel:

  • "Consumers have to feel that their [electricity usage] data will be kept private. That's a problem to be managed, not solved," the panel said.
  • State regulators should require utilities to compile and publish standardized metrics for cost and reliability for public review and as the basis for rate case evaluations.
  • The power industry's regulatory framework is due for an overhaul, but the study did not call for fundamentally overhauling the regulatory regime in place since the 1930s.
  • Outcomes from projects funded by the American Recovery and Reinvestment Act should be widely shared to get the most bang for the buck.
  • There's "no perfect protection from cyber attacks and we have to learn to live with that [fact]," the panel said. But there's no national oversight of cyber security for the distribution system or for the grid as a whole.


My big take-away: utilities need to propose and regulators need to approve more ambitious dynamic pricing programs. Consumer advocates, including AARP, are concerned about the impacts of peak-related price spikes that could impact vulnerable populations such as the elderly and those requiring medical equipment. (We'll hear more from that camp soon in another column.) But regulators involved in moving to retail electricity competition have touted safeguards such as default rates to address those concerns.

Unfortunately, the current and growing backlash against "smart" meters has the potential to derail dynamic rate programs and the industry's inability to accurately and clearly convey the "smart" meter value proposition does not bode well for the MIT panel's recommendation on the next step.

For arguments that run counter to utilities' interests, read:


Phil Carson
Intelligent Utility Daily



Related Topics


Learning and Reapplying the Successes

Agreed. Creating a "Smart Meter" value proposition is needed in order to convey the full potential of Smart Meters and generate consumer demand for dynamic pricing programs. However, achieving this goal will be complicated because utilities are all on a different page in the playbook. Some are further along the AMI adoption/innovation curve than others involving the customer at every step of program development. Others are sitting at the tail-end, waiting out regulatory issues before riding the steep ascent upward. To bridge this knowledge gap, industry leaders must urgently pool resources to gain an understanding of what consumers need and want, how to best communicate the benefits as well as how best to address concerns.

Assessing this need and in keeping with our mission to promote consumer awareness and understanding of the Smart Grid, SGCC conducted research and analyzed many consumer engagement programs across the country. The Excellence in Consumer Engagement research helps the industry gain critical perspective on which programs and incentives have been successful in encouraging customer enrollment. The specific wins of the Salt River Project (OG&E) program are featured. By learning and reapplying the successes of emerging programs, utilities can reduce customer uncertainty with the benefits of smart meter-enabled programs, like dynamic pricing.

Patty Durand, SGCC Executive Director

A worthy plug

Thanks Patty,

We've written on the SGCC's good work and can recommend the cited report as a good resource.

Regards, Phil Carson

Do customers want Dynamic Pricing?

Dynamic Pricing is excellent in theory.But do customers, or the majority of customers want dynamic pricing? There is evidence that in the States that allow retail competition many marketers sell power based on flat price guarantees, at least to large commercial customers.Also many residential customers already have significant difficulty understanding rather complicated utility bills adding the complications of dynamic pricing might only ensure greater customer confusion or at least far greater transactions costs for customers. Sean Casey Santa Rosa, Ca.

Some do

If you look at Salt River Project or OGE, there is a significant number of residential customers that have opted-in to TOU rates.  The rates do provide those who have  flexibility to shift with an opportunity to save money.  They can avoid usage when rates are high, which is countered with lower off peak rates.  There is also a subset who participate because of the technology angle and some do because of the positive environmental impacts.

Consumer Power

With the emergence of the internet and social networks consumers have become empowered as never before.  In 2005 the economist crowned the consumer king and in 2006 the consumer was Time's person of the year.  Utilities can no longer use the big stick to implement programs because we are moving into an increasingly competitive market.  Consumers will have more choices when it comes to selling their unused EV power, selling their non usage (demand response), or purchasing distributed generation. 

It is time for utilities to build relationships with consumers and communicate why a TOU rate is valuable to them personally.  If we force it upon them, they will be resentful, less likely to shift peak usage, and be more likely to go with an alternative when one is made available.

Yes, the research on time of use rates clearly have peak usage benefits, but I have not seen any research that assesses the cost to the customer relationship.  As we move into a more competitive environment, we need to think more like a competitive company and less like a monopoly.  Consumers want options and are empowered with information as never before.  We must be mindful of this trend and find ways to build upon it rather than swim against it.


Progress on this front

For the last two years the Lawrence Berkeley National Laboratory Smart Grid Technical Advisory Project has been working with state commissions to address many of the issues presented in the MIT report. The challenges associated with the implementation of dynamic pricing are significant and critical because pricing is building block that links customer behavior, efficiency, demand response and renewables with conventional supply.


On November 30th the Smart Grid Technical Advisory project presented a webinar for NARUC and state commissions outlining specific recommendations and options to systematically address tranistion strategies for implementing dynamic pricing. Severin Borenstein (Professor of Business at the Haas School of Business) and Ron Binz (former Commissioner, Colorado Public Utilities Commission) presented a range of options designed to transition customers into smart grid compatible rates. The options proposed practical approaches designed to educate and engage customers, mitigate many of the risks considered barriers to implementation, and create a foundation to achieve smart grid benefits.


Options include using shadow bills to provide customers with what is the equivalent of a safe 'virtual participation' experience combined with targeting and proactive rather than reactive options to mitigate customer concerns before they become problems. These are low tech reasonable options that are capable of achieving the objectives highlighted by the panel featured in your article. These approaches directly address consumer advocate, AARP, and regulatory concerns. If the industry is serious about smart grid - these options are worth serious consideration.



Roger Levy

Levy Associates

AMI is a Means to an End

AMI without further add ons, including dynamic pricing, is basically AMR - replaces the meter reader, provides some end of network sensor data - but to truly pay off, smart meter projects require follow through to implement significant changes in rates to drive peak reduction. It's like the House that Jack Built.

AMI produces Interval Data, which enables Digital Billing, which enables Dynamic Pricing, which supports and encourages Demand Response Programs, which complement Energy Efficiency Programs, which together Shift Peak Consumption and Lower Capacity Requirements to Defer or even Avoid Capital Investment in Peak and Base Load Generation and Distribution System Expansion. Break this chain and you get a suboptimal payback from your investment in Smart Meters, but follow through and organize the Demand Side and the benefits start to kick in for a positive ROI.

If a utility does not follow through with a program to modernize its grid as described above, I may be with the Smart Meter skeptics who say that the upgrade is just not worth it. Hard to believe I wrote that, but let's face it, AMI has great potential, but it is expensive and requires follow through to realize the benefits and pay for itsefl - no follow through and it looks more and more like an imprudent expense in a time when capital is hard to come by.

John Cooper, Ecomergence, Austin, TX




Good visual

I get the picture of a nervous herd of gazelles bunched near a water hole, waiting for one to break from the pack and drink, exposing itself to the predators known to lurk for that moment...

It has been proposed (I can't offer attribution, this is a oft-mentioned solution) that utilities segment their customers, identify their early adopters, those motivated  by savings or innovation or environmental factors, and market variable rates to them. Build outward with opt-in policies and document the resulting use cases.

Or ... ram it down everyone's throat (mandatory or opt-out only) and bring the intiative to a grinding halt.

This should be the priority in 2012, along with the "next step," distribution automation. As Cooper says below, AMI investments aren't complete until dynamic rates are introduced.

Can anyone articulate why that should NOT happen?

Regards, Phil Carson  

Dynamic Pricing

For some of your readers, none of the recommendations are a surprise, including a call for regulatory overhaul. After reading Insull's speeches from nearly one hundred years ago, it's clear that at least some of the principles he espoused at the time no longer apply in a more modern world.

Although I think we have more than enough data from pilots to move forward with opt-in dynamic pricing right now, I also think it's going to take other initiatives and a modest amount of research to deal with long-standing issues like the impact of air conditioning on load factors.  Better insulation and more efficient equipment may not buy a whole lot of improvement without addressing ventilation for the solar collector that sits atop most people's homes (their attics).  Better building codes, strictly enforced, will ensure that new construction doesn't require expensive retrofits later. 

Most importantly, regulators and legislators need to figure out what they want and understand the implications of their policy choices.  Dynamic pricing won't work in an environment with flat prices.  Demand response requires either large subsidies or price volatility to work at all, much less work well, and there are going to be supply shortages if demand response that replaces conventional supply in a capacity auction fails to operated when needed.  In spite of all the research and all the talk about how important they are, few people understand what's required for demand response, dynamic pricing and energy efficiency to be successful, what happens when they don't work as planned, and what happens when they do.

Jack Ellis, Tahoe City, CA