How will dynamic pricing actually happen?

Several views on the moving pieces to come

Phil Carson | Jun 26, 2012


An op-ed piece in Monday's Charleston (West Virginia) Gazette struck me as one step in the process of enacting dynamic pricing and reminded me of two other conversations I've had recently. 

In Monday's op-ed piece, "Electrical Grid Demands Smarter Approach," Andy Ott, senior vice president of markets at PJM Interconnection, explained to readers that PJM—the regional transmission organization serving much of 13 Eastern states—has composed market rules to favor "price responsive demand." Essentially, this is enabling linkage between wholesale prices and retail prices, providing the means for dynamic pricing and its benefits. 

The advantages of dynamic pricing allow retail customers to respond to price signals and, if equipped with information and tools, to better manage their overall use. The response to peak pricing—dampened demand—should allow utilities (PJM's customers) to defer capital investment in peaking power plants that only run a fraction of the year but stand-by at great cost to all. 

David O'Brien, director of regulatory strategy for the Bridge Energy Group Inc., made several points around the same theme in an interview yesterday. We'll bring you an in-depth interview with O'Brien next week. And Roger Levy, of Levy Associates, suggested to me earlier this year that, among other things, expensive and innovative customer information systems (CIS) from third parties will be needed to enable dynamic pricing. (Some of Levy's remarks may be found in the following article links.)   

My own coverage of this issue can be traced as I reported on industry discussions in several columns over the past year, beginning with "Dynamic Pricing Now!," "Dynamic Pricing: It's Complicated" and "Customers Need Energy Data First."

For now, back to Ott's op-ed piece. His thesis, familiar to all, particularly in this summer season:

"Today, most consumers pay fixed prices for each kilowatt-hour of electricity they use," Ott wrote. "These prices stay the same throughout the day and don't reflect the wholesale price that suppliers actually pay to buy electricity. That wholesale price changes every hour.

"These fixed retail electricity prices encourage the use of electricity when costs are the highest and the grid is most stressed, as on a hot summer day when air conditioning use is high.

"The Smart Grid can offer a more efficient pricing structure."

Ott continued that smart meters + smart thermostats = automated response to price signals during peak cost periods, saving consumers money and enabling utilities to defer capital investments in peak-power plants. Check!

In his words: 

"At PJM Interconnection ... we're working [on] an approach called price responsive demand (PRD). 

"PRD recognizes that electricity consumption would fall by a predictable amount when variable real-time prices rise. Federal regulators recently approved PJM's plans for applying this more efficient pricing structure to help bring Smart Grid benefits to the PJM region.

"Price responsive demand won't just benefit consumers by helping them pay lower electricity prices. It can also ease stress on the electric grid and ensure its reliability. Homes and businesses would respond to wholesale prices by reducing their usage when electricity demand and prices were high. 

"The two-way communication between home-based automated systems and electricity suppliers could also aid in both short- and long-term forecasting of the electricity needed to meet demand.

"Such efficient use of the grid can delay the need for expensive new generating plants or transmission infrastructure. And that spells savings for power companies and consumers alike."

Ott concluded: 

"By empowering consumers and businesses to respond to changes in real-time wholesale electricity prices, Smart Grid-driven approaches like price responsive demand and flexible rate options can enhance the reliability and economic efficiency of the electric system, help the environment by managing energy consumption, and save money."

PJM's move with PRD is one step en route to "dynamic pricing now!" as my naïve if spirited exhortation would have it. Utilities and regulators in PJM's 13-state territory need to follow through and make dynamic pricing happen for their customers. Those customers will need smart meters and smart thermostats to benefit. 

In that sense, Ott answered my call in a column earlier this month, "Crossroads 2012: Meters and the Future," for a power industry executive to explain to the public why interval meters are needed to achieve the full benefits of grid modernization.  

Now it's up to utilities and regulators in PJM's 13-state region to follow through with both deployment of interval meters and the application of dynamic pricing. 

Phil Carson 
Intelligent Utility Daily 





Related Topics


How will dynamic pricing happen with third party suppliers?

It is encouraging to read about PJM pushing for dynamic pricing in its 13-state territory. Chicago-based CNT Energy has been administering hourly pricing programs for residential customers in Illinois since 2003. The arguments for dynamic pricing that Mr. Ott laid out—customers save money, utilities don’t have to build more peak energy plants—are the same arguments we have used to entice more than 22,000 residential customers statewide to participate in hourly pricing programs. What we’re currently grappling with is how dynamic pricing fits into the new electricity pricing landscape now that multiple electricity suppliers are competing with major utilities. Currently, in Illinois, third party electric suppliers do not offer a dynamic rate option. However, as more customers sign up with third party electric suppliers, dynamic pricing should be considered to promote demand response and load shifting for all of the reasons discussed in the article above. We believe hourly pricing, utilizing either real-time or day-ahead pricing markets, best reflect the reality of what electricity costs and provides consumers with the greatest opportunity to save money. As smart meters are rolled out across the nation, it is important that smart rates accompany the meters. Offering a lower flat rate does not address the need to reduce peak load demand, which will ultimately lead to a truly smart electric grid.

Residential and small business customers will suffer

Welcome ladies and gentlemen to lifestyle change.  This was the goal of Smartgrid.  The first comment mentions ERCOT--well real time, wholesale power in ERCOT went to $3,000/MWh ($3/KWh) briefly  a couple of days ago and was above $1,000/MWh ($1/KWH) for several of the 15 minute settlement price intervals.  Big industrial users typically have electrical supply contracts at a fixed price so who do we think will take the brunt of wholesale price variability?  Do we just cancel all industrial power supply contracts by federal fiat?  Is that really a fair thing to do considering they entered their contracts in good faith?

No residential and small business customers will have to cut power usage because wind just typically is not providing electricity at that time even though the people and businesses who still pay income taxes are subsidizing them.  Solar power will be past its peak output and waning when the peak tops out at 5 or 6PM even though the taxpayers have forced to give them rebates and credits or feed-in-tariffs.  By the way, what happens to the feed-in-tariffs with dynamic pricing?

So, what happened in ERCOT that wholesale prices spike so high?  ERCOT has some 9,800MW of wind turbines installed so that the owners can take advantage of the PTC program to reduce their corporate owners' tax bills.  (Never mind that its record output is only about 7,400MW.)  The baseload in ERCOT is about 30,000 to 32,000MW.  The wind farms, which generally put substantial power into the grid between 11PM or midnight until about 6 or 8AM, bit into the baseload generation and the lack of long term predictability of their output has thrown too many variables into investors' financial models for them to reliably predict a return on investment so there are few plants being built.  ERCOT recently had to demothball about 2100MW of older plants that had been taken out of service because they were uneconomical in order to ensure it had adequate margin.  While the wind generators are collecting federal taxpayer money in the wee hours of the morning, many fossil fired plants are shutdown (or running at a loss in order to be ready to catch the swings in output from the windfarms).  It costs money to start these plants up.  They are burning fuel while not making power or running at a loss and they have to get that money somewhere.

So, real time power pricing will mean residential customers and small businesses either pay through the nose or shut off their air conditioning and other appliances.  What about the people with small babies or those elderly residential customers or those with elderly family members in their homes?  Babies and the elderly lack proper body temperature control.  What about businesses.  Who many customers will come into a sweltering shop or store?  Do they turn off the lights and their computers they use for making their business more cost effective?  How many goods will be ruined by the lack of humidity control?  How much food will spoil more quickly in grocery stores?

Welcome to forced lifestyle control.

Step In the Right Direction

I haven't read the details of PJM's proposal, and of course that's where the devil lies.  However I'll take it on faith that PJM is providing a means to disseminate real-time price data, rather than taking the grid condition signal approach being proposed by the California ISO.

However there's still one critical missing element that's missing, and that's some kind of forward market that extends beyond the next time interval.  Consumer devices need a stream of prices out over the next few hours so that, for example, they can decide when to start precooling a home or small business, and when to turn down the air conditioning.  Electric vehicles need the same kind of information so they can operate in an intelligent way that takes account of grid conditions.

Grid operators are (finally) beginning to understand the need for forward price visibility, which will also benefit generators.  ERCOT has been discussing how to do this for many months and the California ISO proposal includes some similar thinking.

Jack Ellis, Tahoe City, CA

Comment, anyone?

We'll see if we can put that question to Andy Ott at PJM. Stay tuned. 

And thanks for weighing in on the practicalities. 

Regards, Phil Carson