pricing enabled by ami what types? what are the benefits? dr. steven d. braithwait christensen...

Pricing Enabled by AMI What Types? What are the Benefits?

Dr. Steven D. BraithwaitChristensen Associates Energy Consulting

EUCI WebinarSeptember 12, 2006

September 2006 2 CA Energy Consulting

Christensen Associates Energy Christensen Associates Energy ConsultingConsulting

Economic and engineering consulting for electric Economic and engineering consulting for electric utility industry for 30 yearsutility industry for 30 years

1980s – Evaluation of TOU pricing1980s – Evaluation of TOU pricing 1990s – Design and evaluation of RTP1990s – Design and evaluation of RTP 2000s – Market-based cost-of-service and rate 2000s – Market-based cost-of-service and rate

design; measuring customer price response; design; measuring customer price response; assessing benefits of CPP, RTP, DRassessing benefits of CPP, RTP, DR


Background:Background:Brief History of Time-based PricingBrief History of Time-based Pricing

1970s: NARUC encouraged study of marginal 1970s: NARUC encouraged study of marginal cost-based TOU pricing. cost-based TOU pricing. Conclusions and outcomes:Conclusions and outcomes: Residential consumers responded to TOU pricesResidential consumers responded to TOU prices Business case for TOU – marginal due to Business case for TOU – marginal due to metering costsmetering costs TOU pricing implemented widely for large customersTOU pricing implemented widely for large customers

2005: EPAct encouraged states to review time-2005: EPAct encouraged states to review time-based pricing and demand responsebased pricing and demand response Price responsive demandPrice responsive demand needed for efficient wholesale market needed for efficient wholesale market

operationsoperations New positive business case for New positive business case for advanced meteringadvanced metering What are implications for What are implications for time-based pricingtime-based pricing??


Background:Background:Brief History of Time-based Pricing (2)Brief History of Time-based Pricing (2)

2006: FERC report on DR and AMI – based on 2006: FERC report on DR and AMI – based on new survey of utilities new survey of utilities

AMI market share – 6% of electric meters in U.S. AMI market share – 6% of electric meters in U.S. Pennsylvania:Pennsylvania: 52%52% Wisconsin: Wisconsin: 40%40%

Time-based pricing & DR: 5% of customers (most common – Time-based pricing & DR: 5% of customers (most common – direct load control)direct load control)

DR capacity by NERC region: 3 – 7% of summer peak DR capacity by NERC region: 3 – 7% of summer peak (majority is likely interruptible service or emergency programs)(majority is likely interruptible service or emergency programs)


Background:Background:The Need for Price-responsive DemandThe Need for Price-responsive Demand

Existing energy Existing energy market inefficienciesmarket inefficiencies:: VaryingVarying hourly marginal costs – many low-cost hourly marginal costs – many low-cost

hours; few very high-cost hours (hours; few very high-cost hours (e.g.e.g., 1 – 2%), 1 – 2%) FixedFixed retail prices retail prices

Result in:Result in: Non-responsive electricity demandNon-responsive electricity demand Extra generation capacity and higher-than-Extra generation capacity and higher-than-

necessary costs to meet necessary costs to meet non-responsive demandnon-responsive demand


How to Improve Economic Efficiency?How to Improve Economic Efficiency?

Dynamic pricingDynamic pricing that reflects market costs: that reflects market costs: All the time:All the time: Real-time pricingReal-time pricing When most important:When most important: Critical peak pricing, Critical peak pricing,

Day-type TOUDay-type TOU

Demand responseDemand response (DR) programs – payments (DR) programs – payments for load reductions when reliability endangered for load reductions when reliability endangered or market cost is high:or market cost is high: Interruptible/Curtailable service Interruptible/Curtailable service Buy-back programsBuy-back programs ISO DR programs (PJM, NYISO, ISO-NE)ISO DR programs (PJM, NYISO, ISO-NE)

Peak reductions and load shifting from high-cost to Peak reductions and load shifting from high-cost to low-cost hours produce low-cost hours produce cost-saving benefitscost-saving benefits


Examples of Examples of DynamicDynamic Pricing Pricing(Dispatchable pricing that reflects market conditions)(Dispatchable pricing that reflects market conditions)

Large customers: Large customers: RTPRTP Georgia Power (2,500 customers, 80% of C&I load)Georgia Power (2,500 customers, 80% of C&I load) Duke Power (50 – 100 very large customers)Duke Power (50 – 100 very large customers) Competitive retail providers (NY, NJ, Texas)Competitive retail providers (NY, NJ, Texas)

Residential customers:Residential customers: Gulf Power – permanent CPP (GoodCents Select) Gulf Power – permanent CPP (GoodCents Select) CPP pilots – CA, NJ, MO, Idaho, DCCPP pilots – CA, NJ, MO, Idaho, DC RTP pilot in ChicagoRTP pilot in Chicago Critical-day Critical-day rebaterebate pilot – Anaheim, CA pilot – Anaheim, CA Day-type TOU – EdF (France)Day-type TOU – EdF (France)


Common Technology Features to Common Technology Features to Support Dynamic Pricing and DRSupport Dynamic Pricing and DR

MeteringMetering to record hourly (or TOU) usage to record hourly (or TOU) usage CommunicateCommunicate price changes price changes Provide customer Provide customer accessaccess to usage information to usage information ControlControl devices to facilitate load response devices to facilitate load response

Communication & control devices increase Communication & control devices increase price response, but are more costlyprice response, but are more costly


Economic Benefits from Price-Economic Benefits from Price-Responsive DemandResponsive Demand

Fundamental source of economic benefits:Fundamental source of economic benefits: Cost savingsCost savings from load reductions at high prices from load reductions at high prices

Load reductions replace the need for a comparable amount of Load reductions replace the need for a comparable amount of peaking capacity (see M. Reeder, Elect. Jl., July ’06)peaking capacity (see M. Reeder, Elect. Jl., July ’06)

Expanded net valueExpanded net value from increased usage at low prices from increased usage at low prices

Factors that affect amount of benefits:Factors that affect amount of benefits: Price Price variabilityvariability (greater benefits with more high-price & (greater benefits with more high-price &

low-price opportunities)low-price opportunities) Customer price Customer price responsiveness responsiveness (achieving benefits requires (achieving benefits requires

customers to modify usage)customers to modify usage)


Summary of Findings on Customer Price Summary of Findings on Customer Price ResponsivenessResponsiveness

Customers on average respond to prices, in reasonably Customers on average respond to prices, in reasonably consistent ways (TOU, CPP & RTP price elasticities)consistent ways (TOU, CPP & RTP price elasticities)

A minority of customers (10 – 20%) appear to respond A minority of customers (10 – 20%) appear to respond much more than averagemuch more than average

Many consumers appear unresponsive to modest pricesMany consumers appear unresponsive to modest prices Some consistent indicators of Some consistent indicators of most responsive most responsive customers customers

Energy-intensive industrialsEnergy-intensive industrials Enabling technology Enabling technology

Easy product storage – rock crushing, water utilitiesEasy product storage – rock crushing, water utilities Automated controls Automated controls


Price-Responsive C&I TOU CustomersPrice-Responsive C&I TOU CustomersPercent by Size and Business TypePercent by Size and Business Type

0%

5%

10%

15%

20%

25%

30%

Food/paper/chem Plast/stone/metal Util/water/pumps Retail Offices ServicesSIC Group

Medium Large Very large


Quantitative Estimates of DR BenefitsQuantitative Estimates of DR BenefitsBased on evaluation of dynamic pricing potentialBased on evaluation of dynamic pricing potential

Typical net benefits small relative to total billTypical net benefits small relative to total bill 0.5 – 2% of consumers’ original bills 0.5 – 2% of consumers’ original bills Analogous to productivity increaseAnalogous to productivity increase Note that consumers incur costs to respond – benefits are net Note that consumers incur costs to respond – benefits are net

of these costsof these costs

ResidentialResidential customer: $10 – 50 / year customer: $10 – 50 / year IndustrialIndustrial customer (5 MW): $20,000+ customer (5 MW): $20,000+ SystemSystem (10,000 MW): $50 million (10,000 MW): $50 million


DR Benefits vs. Metering CostsDR Benefits vs. Metering Costs

If metering costs must be justified by DR If metering costs must be justified by DR benefits alone:benefits alone: Dynamic pricing for medium to large customers Dynamic pricing for medium to large customers

can be justified relatively easilycan be justified relatively easily More difficult business case for mass-marketMore difficult business case for mass-market

If business case for AMI can be made on If business case for AMI can be made on operational savings and other benefits:operational savings and other benefits: Much lower hurdle for dynamic pricingMuch lower hurdle for dynamic pricing Benefits from DR can help support a marginal Benefits from DR can help support a marginal

business casebusiness case


Illustrations of Dynamic PricingIllustrations of Dynamic Pricing

CPP compared to traditional TOUCPP compared to traditional TOU

RTP with financial hedge for risk managementRTP with financial hedge for risk management Regulated utilityRegulated utility Competitive provider in restructured states Competitive provider in restructured states


CPP/TOU Rate DesignCPP/TOU Rate DesignWeekday price profileWeekday price profile

0

0.1

0.2

0.3

0.4

$0.5

1 8 14 18 20 24

Critical price

TOU Peak Price

Standard Rate Peak price w/ CPP

Off-peak

Mid-peak


Real-time Pricing (RTP)Real-time Pricing (RTP)

Hourly pricesHourly prices – Day-ahead, hour-ahead, real-time – Day-ahead, hour-ahead, real-time

Prices reflect marginal cost of energy and reserves Prices reflect marginal cost of energy and reserves (wholesale energy prices/LMP)(wholesale energy prices/LMP)

Most successful form – two linked contractsMost successful form – two linked contracts Hourly pricing for all usage, Hourly pricing for all usage, plusplus Financial Financial contract-for-differences – contract-for-differences – guarantees guarantees fixedfixed

price for price for fixedfixed contract quantity contract quantity

Success story at regulated utility – Georgia Power Success story at regulated utility – Georgia Power CompanyCompany


Example of Example of RTP with HedgingRTP with Hedging in in Competitive Retail Energy MarketsCompetitive Retail Energy Markets

Constellation NewEnergyConstellation NewEnergy has 6,000 MW of large has 6,000 MW of large customer load on similar RTP productscustomer load on similar RTP products Customers face Customers face hourly priceshourly prices indexed to RTO day-ahead or real- indexed to RTO day-ahead or real-

time prices (time prices (e.g.e.g., PJM, ERCOT), PJM, ERCOT) Customer selects amount of load to be covered by Customer selects amount of load to be covered by fixed-pricefixed-price

contracts (typically less than expected usage)contracts (typically less than expected usage) Balancing loadsBalancing loads (above and below contract level) are settled at (above and below contract level) are settled at

indexed pricesindexed prices

Consumers have incentive to respond to hourly Consumers have incentive to respond to hourly prices, but manage their price riskprices, but manage their price risk

Natural pricing product for a commodity with price Natural pricing product for a commodity with price volatility and forward marketsvolatility and forward markets


kWh

Price

PB

KB

Demand

RTP with Financial Hedge: Fixed hourly load (KB) billed at fixed price PB

Base bill

Fixed price can be TOUpeak and off-peak, withvalues set by forward power contracts.


kWh

Price

PB

KB

Demand

Added Customer Value at Low RTP Prices

Base bill

Added net value fromload increase

PRTP

KA

low

Bill for incrementalusage


kWh

Price

PB

KB

Demand

High RTP Price: Bill Increase for Usage Beyond Contract Quantity If No Response

Base bill

PRTP

KA

norm

Potential bill for normalusage beyond KB


kWh

Price

PB

KB

Demand

Benefit from Load Response at High RTP Price: Bill savings > Curtailment cost

Base bill

PRTP

KA

norm

Net benefit from load reduction

Curtailment cost

Total bill savings – fullrectangle


ConclusionsConclusions

Dynamic pricing can improve Dynamic pricing can improve market market efficiencyefficiency and provide and provide cost-saving benefitscost-saving benefits

Benefits may be shared by consumers and Benefits may be shared by consumers and providers (through margins or premiums)providers (through margins or premiums)

Potential benefits from dynamic pricing can Potential benefits from dynamic pricing can enhance the business case for AMIenhance the business case for AMI

If the business case for AMI can be made If the business case for AMI can be made withoutwithout DR, then the cost barriers to dynamic DR, then the cost barriers to dynamic pricing are reduced substantially pricing are reduced substantially


Contact InformationContact Information

Steven BraithwaitSteven Braithwait

[email protected]@caenergy.com

608-231-2266608-231-2266

pricing enabled by ami what types? what are the benefits? dr. steven d. braithwait christensen...

Documents

s evaluation of tou

metering costs tou pricing

time based pricing

tou marginal

large customers tou

s marketbased cost

dr slide

s design