Dynamic pricing touted, questioned

Readers weigh in on PJM's efforts

Phil Carson | Jul 05, 2012

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With interval meters rolling out by the tens of millions, many in the power industry (and, indeed, outside it) question whether and when a key application will be made widely available: namely, dynamic pricing.

In a recent column, "How Will Dynamic Pricing Actually Happen?" we discussed an op-ed piece by PJM Interconnection's Andy Ott, senior vice president of markets. PJM-the regional transmission organization serving much of 13 Eastern states-has composed market rules to favor "price responsive demand." Essentially, PRD enables linkage between wholesale prices and retail prices, providing the means for dynamic pricing and its benefits, according to PJM. Please follow the link to the original column which links to Ott's op-ed piece for the gist. 

Naturally (I'm grateful to report), practitioners, observers and critics provided their views on our forum, and I'll quote three here, though the full remarks appear below the original column. These reader commentaries are useful, obviously, because they draw the curtain back more widely than any addled columnist can do alone.

First to comment on the column and Ott's thesis last week was consulting engineer, Jack Ellis, from Tahoe City, Calif.  

"I haven't read the details of PJM's proposal, and of course that's where the devil lies," Ellis wrote. "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.

"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," Ellis continued. "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," Ellis concluded. "ERCOT has been discussing how to do this for many months and the California ISO proposal includes some similar thinking."

The next commenter (anonymous) sounded a bit agitated, as you'll see. The writer clearly believes that dynamic pricing will be forced on the public, rather than exist as an opt-in program for those who wish to manage use rather than go with a flat rate.  

"Welcome ladies and gentlemen to lifestyle change," our correspondent wrote. "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? Or 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," our correspondent continued, "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, 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," our correspondent wrote, summing up his/her view. "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."

A more optimistic view was contributed by another writer, clearly a practitioner who chose to remain anonymous. But he/she added a third element to the discussion: the reality of how dynamic pricing is actually entering the market, based on experience rather than fear.  

"It is encouraging to read about PJM pushing for dynamic pricing in its 13-state territory," our reader wrote. "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," our writer continued. "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."

I sincerely hope readers enjoy the discussions they themselves create on our forum. They're educational and eye-opening for me and I think sharing perspectives will enhance the discussion. 

Phil Carson 
Editor-in-chief
Intelligent Utility Daily
pcarson@energycentral.com
303-228-4757

 

 

 

 

 

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Comments

The reality of merchant markets and hourly pricing

ERCOT is pretty much a merchant electrical market.  There are a few municipal electric utilities remaining but, by-and-large, the utilities are now transmission and distribution providers and wholesale power is separated from that and is a competitive market with no capacity payment available.  Add on top of that almost 10,000MW of wind, subsidized by production tax credits, and you get a really volatile market.  ERCOT presently utilizes 15 minute pricing due to massive instability created by the variability of wind.  The price cap is presently $3,000/MWh and goes to $4,500 in August in an attempt to entice construction of new generation which is not happening presently because the market volatility with wind in the mix prevents reliable financial modelling. The wind generators will continue generating into a negatively priced market to get the PTCs for their parent companies and not many generator owners are willing to play that game.  Judging by a map I saw in a trade journal yesterday which showed the average monthly power bill for residential comsumers, the situation is not really benefitting them much--Texas was among the highest priced states--either the 3rd or 4th most expensive if I remember correctly.

Real time marketing--be careful what you wish for because you might get it.  Right now, with the volatility of pricing many generators prefer to not bid into the day ahead market in ERCOT.  Why pass up the opportunity to pick up on some $100, $1000, or $3000/MWh revenue to get some $30/MWh revenue?  It is difficult to run a competitive market with one party getting massive government subsidies via PTCs while the rest have to play profit and loss only.