Dynamic Pricing & Customer Behavior

By Jeff Postelwait, Online/Associate Editor

The idea of providing electric customers with dynamic pricing information as a way of reducing peak demand is gaining traction as utilities begin looking for new ways to become more reliable and efficient.

Fixed pricing is still the industry standard for charging customers for electricity usage, but some industry professionals say a pricing structure that incentivizes less energy use could save the industry money in the long run.

Time-of-use pricing structures, which use tiered pricing depending on the time of day the energy is consumed, could be one way of achieving this goal. Even more responsive is dynamic pricing, where customers receive information on their energy use several times an hour–a lofty goal.

Some in the industry say technology that allows this kind of two-way information exchange between consumers and utilities could provide a stronger return on capital investment than many alternatives.

Kourosh Boutorabi, vice president and general manager of Teridian Semiconductor’s metering and business unit, said the idea behind dynamic pricing is that greater efficiency can be achieved as more information is given to the end-use customer.

Teridian Semiconductor designs, manufactures and provides engineering support for its system-on-chip integrated circuits used in the energy measurement, control and communication markets.

Customer habits will have to change over time so people can get used to thinking more about their energy-consumption habits, Boutorabi said.

“Dynamic pricing is like trading stock in a way,” he said. “People now are used to going online and checking on how their stocks are doing. With real-time information you can manage them without having to go to a stockbroker or another middleman.”

The most effective dynamic pricing systems will be the ones that allow customers to set and forget their advanced metering systems.

In general, people don’t want to spend a lot of time talking about their energy usage, Boutorabi said. Customers know they want to use less energy, but they might not take an active role in managing their energy use, he said.

Steve Sunderhauf, PEPCO Holdings Inc.’s manager of program evaluation and design, said dynamic pricing enables utilities to better serve their customers by reducing capacity and peak energy requirements.

“This places downward pressure on supply costs for all customers and helps to ensure the continuing reliability of the electric grid,” Sunderhauf said. “Dynamic pricing will assist utilities in accommodating new end uses such as plug-in vehicles and small-scale renewable generators, all of which will receive the appropriate price incentives in their operation.”

Kurt Yeager, executive director of the Galvin Electricity Initiative (GEI), said the fixed pricing systems in use for decades have turned consumers into “energy pigs” and created an environment where utilities have an incentive to allow their consumers to use too much energy.

GEI, founded in 2005, is a group of electricity industry veterans who advocate for intelligent microgrids to transform the power system for the 21st century.

“We’re behind the Iron Curtain of the meter, if you will, which provides no two-way communications between utilities and customers,” Yeager said. “Fixed pricing gives no incentive for consumers to pay attention to pricing signals for even those who get them.”

Without two-way communication, advanced metering infrastructure (AMI) and other smart grid technologies do not live up to their full potential–and may not justify their costs, he said.

As with any far-reaching technology with potential for changing an entire industry, these technologies carry with them a price tag. This price tag could put dynamic pricing out of reach for many of today’s utilities, Boutorabi said.

“It is extremely expensive to handle real-time amounts of data, he said. “It is beyond the means of smaller utilities to install the advanced infrastructure. It’s a good vision to have, but it is somewhat futuristic.”

Time-of-use pricing structures could be a more practical alternative to dynamic pricing, he said.

“That doesn’t put as much pressure on the network as real-time pricing does,” Boutorabi said, “but it does help consumers become more aware of their energy usage. It’s not real time, but it’s better than fixed price. It’s more realistic in the short-term.”

Yeager said the primary barrier to implementing these new systems is not cost, but regulatory agencies that are not open to the idea of advanced metering or smart grid applications.

“The cost to benefit ratio of these technologies is not just marginally favorable, it’s fundamentally favorable,” Yeager said. “The beauty of this is that if it’s done properly, one side doesn’t win and the other side doesn’t lose. All stakeholders benefit, but it must be demonstrated first.”

State and local regulatory agencies, however, can tend to view changing the way the electric grid functions as a threat to the status quo, he said.

“The basic barrier is regulatory,” he said. “The regulatory structure has been resistant to this kind of consumer empowerment. They still operate as if they were the consumer and are protecting you from the utility.”

Because utility stockholders make money based on how much electricity they sell, utilities want to make sure their stockholders are not punished, he said.

“The utility incentive should be to sell better service, not just more power,” he said. “It’s a whole different business model for the electric power industry.”

Sunderhauf said PHI’s ability to implement an AMI system and offer dynamic pricing would require regulatory authorization to do so. The company has been given the OK to deploy an AMI system in Delaware, he said.

“PHI plans to introduce voluntary dynamic pricing for customers served under standard offer service generation supply after AMI is deployed,” Sunderhauf said. “State regulatory commissions must approve the dynamic pricing rates and their application prior to actual billing under these rates. PHI plans to offer customers demand response enabling technology that will automatically reduce central air conditioner load for residential customers, subject to regulatory commission authorization to do so.”

Yeager said his institute initially was hopeful about the prospect of the Barack Obama administration and its talk of employing smart grid technologies, but the projects the U.S. Department of Energy (DOE) is granting money to might wind up preserving the same old way of doing business in the power industry.

“About $4.3 billion has been allocated through the DOE for smart grid stimulus,” Yeager said. “The DOE is under a lot of pressure from Congress to spend that money, so that means a lot of small, shovel-ready projects. They may buy a few meters or a few transformers, but they will not be the large, comprehensive projects that we need to get the most out of the technology.”

The benefits of dynamic pricing and its ability to improve reliability and efficiency will not be appreciated fully until the technology is tested on a wider scale, Yeager said.

“It has to be demonstrated to the consumer as well as the industry,” he said. “People need to kick the tires on this idea and decide for themselves. Then they can put pressure on their local governments to make this idea happen.”

Sunderhauf said that while he cannot speak for other utilities about these technological changes, PHI sees their promise.

“At PHI, we embrace these technological changes and believe they will be extraordinarily beneficial to our customers through service quality improvements, the ability for customers to better control their energy costs, placing downward pressure on regional electricity prices, appropriately accommodating new end-use loads and small-scale generators, and assisting utilities so the reliability of electric service is maintained,” Sunderhauf said.

The company submitted a request for federal stimulus funds to support AMI and dynamic pricing in PHI’s Maryland, District of Columbia and Delaware service territories.

Matching funds, he said, will be sourced primarily through electric distribution rates and utility operational savings.

In the meantime, dynamic pricing, advanced metering and the smart grid with all its many proposed parts remain a futuristic idea that holds promise but has yet to be completely sold to the public and the electricity industry, Yeager said. What he calls “dumb power” is still being delivered.

“Our power grid right now is like a railroad that takes 10 days to open or close a switch,” Yeager said. “The utility industry is perhaps the last bastion–an industry being largely controlled by analog electromechanical devices at a time when everything else is digital.”

 

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