Dynamic Pricing - Potential and Issues

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Dynamic Pricing - Potential and Issues

• Joe Wharton and Ahmad Faruqui
• Kansas Corporation Commission Workshop on
• Energy Efficiency
• March 25, 2008

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Policy of Dynamic Pricing raises important
questions

1. What is the potential impact of dynamic pricing
   on peak demand?
2. What is the value of this demand response (DR)?
3. How much does customer price responsiveness vary
   by customer and region?
4. How can rate design make dynamic pricing more
   attractive to customers?

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Dynamic pricing can lower system peak demand by 5
percent, considerably below the economic and
technical potential
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A 5 percent reduction in US peak demand could be
worth 31 billion over a 20-year period, just on
avoided costs

• Assumptions
• 5 demand reduction in 757 GW
• 52/kW-year capacity price
• 20 year horizon
• 15 discount rate
• 2 peak growth rate
• Avoided cost of energy is 36 of avoided cost of
  capacity
• Value of wholesale price reduction is 278 of
  avoided cost of capacity
• Derived from a study on the value of DR in PJM
  
• The Brattle Group, 2007, Quantifying Demand
  Response Benefits in PJM, Prepared for PJM and
  MADRI

NPV of Avoided Costs 31 billion
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There is a range of pricing options from
static (fully hedged) to dynamic
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What peak demand reductions come from dynamic
pricing - results from pricing pilots
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Across the TOU pilots, there is solid evidence of
demand response
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Dynamic pricing gives rise to greater peak
reductions
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The Peak Time Rebate (PTR) rate has achieved
demand response in two pilots
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Different Critical Peak Pricing (CPP) tariffs
induce different load impacts during event days
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Enabling technologies magnify demand response
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Mass Market customers response varies by
enabling technologies and the customers end uses
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Applying these relationships, one expects to find
customer responses will vary by region
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But there is equity issue could Bills rise for
50 of the customers choosing dynamic pricing
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A discount could be build-in for the insurance
or risk premium incorporated in flat or hedged
rates

• Empirically, this insurance premium is
  estimated to range from 3 to 13 percent for
  different types of time-varying rates
• Illinois used a value of 10 percent in its RTP
  pilot for residential customers
• Monte Carlo simulations with a standard financial
  equation suggest a mean value of 11 percent
• A conservative estimate is 3 percent

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By adjusting for conservative risk premium,
dynamic pricing rates become attractive for 70
of customers
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Also factoring in the demand response expands the
appeal to 90
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Conclusion the way forward should involve a
careful look at the range of dynamic pricing
options
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Footnotes

• See A. Faruqui and L. Wood, Quantifying the
  Benefits of Dynamic Pricing in the Mass Market,
  for EEI, Jan 2008.
• Note Percentage reduction in load is defined
  relative to the different bases in different
  pilots. Following notes are intended to clarify
  these different definitions. TOU impacts are
  defined relative to the usage during peak hours
  unless otherwise noted. CPP impacts are defined
  relative to the usage during peak hours on CPP
  days unless otherwise noted.
• Ontario- 1 refers to the percentage impacts
  during the critical hours that represent only 3-4
  hours of the entire peak period on a CPP day.
  Ontario- 2 refers to the percentage impacts of
  the programs during the entire peak period on a
  CPP day
• TOU impact from the SPP study uses the CPP-F
  treatment effect for normal weekdays
• PSEG program impacts represented in the TOU
  section are the impacts during peak period on
  non-CPP days.
• PSEG program impacts represented in the CPP
  section are derived using the reported kWh
  reductions and the estimated consumption during
  the peak period on CPP days
• ADRS- 04 and ADRS- 05 refer to the 2004 and 2005
  impacts. ADRS impacts on non-event days are
  represented in the TOU with Tech section
• CPP impact for Idaho is derived from the
  information provided in the study. Average of kW
  consumption per hour during the CPP hours (for
  all 10 event days) is approximately 2.5 kW for a
  control group customer. This value is 1.3 kW for
  a treatment group customer. Percentage impact
  from the CPP treatment is calculated as 48.
• Gulf Power-1 refers to the impact during peak
  hours on non-CPP days while Gulf Power-2 refers
  to the impact during CPP hours on CPP days.
• Ameren-04 and Ameren-05 refer to the impacts
  respectively from the summers of 2004 and 2005.
• SPP- A refers to the impacts from the CPP-V
  program on Track A customers. Two-thirds of Track
  A customers had some form of enabling
  technologies.
• SPP-C refers to the impacts from the CPP-V
  program on Track C customers. All Track C
  customers had smart thermostats.