by Jason Cigarran, Comverge
For too long, utilities have struggled to manage the imbalance between the cost of generating electricity and the price end users pay for that power.
A recent Brattle Group report highlights the discrepancy.
The study found that consumers on flat-rate pricing plans who don’t use much energy during peak hours likely end up subsidizing heavy-peak users by as much as $3 billion cumulatively per year.
Collectively, these customers might overpay for electricity by some $7 billion annually (as determined by the Federal Energy Regulatory Commission (FERC) staff estimate of 92 GW saved under universal dynamic pricing and valuing demand response at $75 per kW-year).
As the energy industry sharpens its focus on making the smart grid a reality, resolving this price imbalance is crucial, and it requires collaboration between utilities and their customers.
Engaging customers in understanding their energy consumption patterns and educating them about ways they can curb their utility bills leads to higher enrollment in demand response initiatives and greater support for smart grid technology.
State commissions and utilities are turning their attention to dynamic pricing programs, which enable customers to choose electricity price structures that best fit their consumption habits and help them save on energy costs.
Dynamic pricing programs enable a better balance by promoting economically efficient energy usage, limiting the need for expensive peaking capacity while creating a two-way communication between utilities and customers.
How Dynamic Pricing Works
Dynamic pricing takes several forms, and each one may work better for some customers than others.
Many successful dynamic pricing programs allow customers to opt in to one or more programs at a time, allowing for additional control, and permit customers to decide when to opt out. The models include:
Real-time pricing. Real-time pricing lets customers pay for electricity at wholesale prices during a predetermined interval.
Utilities provide prices in advance–usually either a day or an hour ahead of a scheduled event–and customers can commit to reducing an entire load or a portion of the load.
Often viewed as the purest form of dynamic pricing, real-time pricing provides a small price responsive interval that leads to a closely linked cost-price ratio.
Real-time pricing tends to work best for commercial and industrial (C&I) customers that use much energy.
Critical-peak pricing. Critical-peak pricing incentivizes customers to lower their energy use during peak periods by raising prices during these times.
Utilities dispatch critical-peak pricing rates, and customers have the option of decreasing consumption to avoid higher bills.
Although it operates as a penalty against customers who don’t reduce their demand at peak times, critical-peak pricing has proven one of the most effective ways to lower peak demand substantially.
Time-of-use pricing. Not dynamic in the strict sense because they don’t correlate to wholesale market rates, time-of-use (TOU) programs nevertheless encourage customer engagement because they allow for set rate changes that correspond to particular times.
For instance, a utility may define a peak period as 11 a.m. to 5 p.m. weekdays with remaining hours labeled off-peak.
That utility will dispatch different rates during these different time periods, and customers can adjust their energy usage accordingly.
Peak-time rebate. Peak-time rebate programs offer customers rebates in exchange for reducing energy consumption during peak demand.
Utilities determine rebates by comparing the amount of load reduction to a calculated baseline usage level.
They generally limit peak-time rebate to a certain number of days within each calendar year.
Engaging Customers Through Dynamic Pricing
For any of the mentioned dynamic pricing programs to work, they must attract customers by communicating the program’s benefits in easy-to-understand terms and clearly explaining how it will lower energy expenses.
The programs also must be backed by sophisticated market analysis and segmentation tools that enable utilities to identify customers most likely to enroll and be active participants in dynamic pricing programs.
Next, to ensure the broadest reach, dynamic pricing programs must be supported by various marketing channels, including direct mail, online advertising, social media and broadcast media to get customers enrolled.
Finally, to fulfill their potential for predictable energy reduction, dynamic pricing programs need effective supporting technology such as a demand response management system (DRMS) or energy management devices including smart thermostats or digital control units.
A DRMS facilitates two-way communications between utilities and their customers.
Utilities can send customers real-time or day-ahead price signals to various endpoints, including Web portals, programmable communicating thermostats, smart thermostats, in-home displays (IHDs) or mobile devices such as iPhones.
Customers communicate back by using these endpoints to change the settings on their appliances, including air conditioners, heating systems, washers and dryers, pool pumps and water heaters.
These communications typically take place through advanced metering infrastructures (AMI) or existing networks such as broadband or cellular.
In addition, automation is key to driving value for a dynamic pricing program.
The Web portals and smart thermostats let customers set control schedules for their high-energy appliances.
This “set it and forget it” capability makes participation simple: It’s a one-time task.
Through automation, utilities also gain advance insight into the total capacity made available by the program participants.
Compared with manual customer electricity adjustments, automation can result in an approximately 40 percent increase in peak-demand reduction, according to studies.
Measurement matters, too, and utilities benefit from monitoring and ensuring event performance.
Data on device usage and future forecasts based on past event participation help ensure success.
Load and event analysis, forecasting and customer analysis and class-type segmentation also contribute to system optimization.
Dynamic Pricing in Action
Two real-world examples of dynamic pricing success help illustrate how engaging customers in dynamic pricing programs works.
These utilities have built positive relationships and delivered energy reductions through their collaboration with customers.
Gulf Power. Serving more than 430,000 customers in northwestern Florida, Gulf Power has a national reputation among utilities as a leader in energy efficiency.
Its 12-year-old Energy Select TOU-critical-peak pricing program is the largest automated residential dynamic pricing initiative in the country with 10,000 enrolled participants. The program boasts 90 percent customer satisfaction rates and has enabled Gulf Power to reduce peak demand and avoid building additional generating facilities.
The utility derives these benefits from its dynamic pricing program by providing customers with opt-in opportunities for simplified energy management. Using customers’ existing broadband networks and a ZigBee gateway, Gulf Power establishes a two-way connection with participants. Within the program’s portal, customers can preprogram their central cooling and heating systems, electric water heaters and pool pumps to respond automatically to pricing tiers and price signals. Customers set it and forget it, making for easy engagement and predictable load reductions. Gulf Power gains a reliable source of capacity, and participants pay less for electricity nearly 87 percent of the time.
Tampa Electric Co. Tampa Electric Co. based its Energy Planner program on the successful Gulf Power Energy Select model. The utility services some 672,000 residential and C&I customers in 2,000 square miles of Florida. Energy Planner combines TOU and critical-peak dynamic pricing structures to engage more than 2,000 customers.
Participants can automate control of their energy consumption to reduce usage during peak demand, thereby avoiding paying the highest electricity rates.
Like Energy Select, Energy Planner uses customers’ broadband networks and a ZigBee-based home-area network to gather and decipher data from smart meters, residential gateways and other energy management devices.
Tools including smart thermostats and digital control units let customers control their heating and cooling systems, water heaters and pool pumps in accordance with dynamic pricing rates.
Tampa Electric Co. adjusts among four price points–low, medium, high and critical–to deliver lower rates about 87 percent of the time. The utility can execute the critical-peak rate within minutes, and since 2008 it has reliably shed 3.1 kW per customer at winter peak and 2 kW per customer at summer peak.
Success Through Customer Engagement
The programs implemented by Gulf Power and Tampa Electric Co. demonstrate dynamic pricing programs can generate powerful results. Improved customer satisfaction, lower peak demand and utility bill savings contribute to sustainable changes in the way we manage energy consumption. With effective implementation and automation, utilities can continue to build on these models to expand participation and advance the role customers have in controlling their energy use and expenses.
In addition, by adhering to an opt-in model, utilities can work to target customers based on their preferences for increased success.
Dynamic pricing stands to change the way energy is delivered around the world, bringing bottom line benefits in the present and advancing a smarter grid long term.
Jason Cigarran is the vice president of marketing for Comverge , a leading provider of intelligent energy management solutions that enable utilities, grid operators and commercial and industrial organizations to optimize their energy usage to reduce costs, meet regulatory requirements and support sustainability initiatives.More PowerGrid International Issue Articles
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