For starters, what is an equitable price for the electrical energy consumed? It is one, or a combination of parameters? The current answer and possibly the worst is real time dynamic prices at the retail level. Real time pricing creates more questions than answers: What parameters should incorporated into the real time price? Should it be the spot price? The system maximum cost, or system average cost? The spot energy price and system average cost may not even be the same order of magnitude. System average cost is logical factor of fair and equitable that seems ignored by all. It rarely even used as a discussion point in the debate over real time pricing.
If seems forgotten the purpose of all of these schemes is to subject each customer to the cost of the capacity and fuel they are using in a fair and equitable fashion. The goal should not be the imaginative use of the latest technology and gadgetry.
Fairness of current fixed price rate structures is questionable since load profiles follow the economic status of customers to a significant degree. Affluent customers, tend to use disproportionately more comfort cooling with higher loads during peaks compared to flatter profiles of those with lower means. In simple terms, in our current fixed priced energy system the lower income customers subsidize capacity for the higher income customers since capacity costs are socialized across all customers. If fairness is a goal our current structure is lacking, the status quo is an easy but poor choice.
Regressing back to capacity, generation capacity has a finite value in the range of $6-10 per Kilowatt (KW) month. Dollars/KW month is the most common capacity product measure. Using the high end of capacity cost a 10KW residential customer doubling up to 20KW uses an additional $100/month in capacity. The cost of the capacity reflects the overnight cost of the supplying resource. Capacity is real and does not exist in the moment alone. The common error is to envision schemes like Critical Peak Pricing (CPP) that collect for capacity based on short intervals as if it did exist in that moment alone. The provider has the capacity year round, often for many years so the provider's commitment is $1200/Kilowatt Year (KWY) for many years. If capacity is required for only a few hours a year, it makes those Kilowatt Hours (KWH) very expensive. As an extreme example, if the 20KW is needed twenty hours per year and only 10KW all other hours those twenty hours have a $60 per hour capacity cost that is socialized across all customers.
It may well be worth the $60/hour to some customers and not to others. If a 1KW of draw is used for only a single hour during the year in theory that KWH cost somebody a $100 plus the fuel to convert it to energy. Scaling up to MWHs it is $100,000/MWH power which is 1000 times higher than typical $100/MW residential rates. These numbers ramp up as capacity factor drops and this relationship is used to justify all manner of scheme. It is arguable whether reality matches the possible number play, but it does illustrate the kind of incentive needed to invest in capacity without some measures of surety.
Capacity demand is not quite this simple, the big capacity driver "Comfort Cooling" KW draw is limited by air-conditioning (AC) unit size. What happens during Critical Peak Periods based solely on load is not an increase in individual AC KW demand as used above for an example, it is rather a decrease in off cycles or more simply stated an increase in AC capacity factor so during any given moment more members of the entire AC fleet are service. On the hottest days almost the entire customer AC fleet will likely be in service for several hours nonstop. The customers used that same peak KW demand as on many other days, but the system had a demand averaging effect. Unfortunately as temperature climbs the system demand moves closer to the sum total of all customer AC demand.
Time of Use Rates
The TOU concept is sound as long as the rate scaling is equitably. TOU use rates without random Critical Peak Pricing can be fair and equitable. However, there is a wide chasm between the plans offered by IOUs, Coops and Munies. TOU rates are sliding rates based on time of day and time of year. Assuming future possibly mandatory plans will look like current voluntary plans that several IOUs offer the IOU programs appear punitive to ratepayers. The following prices were pulled from an IOU's TOU sight other than being rounded and converted to percents from cents per KW listed on the site. The IOU's fixed retail rate was just below $.10/KW. Off peak (lowest) prices were slightly cheaper at 89% of the fixed price rate. The shoulder hours of the peak period were 93% of the fixed. The peak hours of peak periods were 158% of fixed with random Critical Peak Periods at 424% of fixed. The maximum theoretical saving by using only off peak power is 11%. It is immediately obvious that ratepayers will not be saving much. A typical load profile is peak usage of around twice of off peak usage. Looking at much more desirable flat load profile with the 1.5% CPP allowed in the rate structure the electrical usage will cost 105% of fixed. The rate becomes break even to fixed at .5% CPP. The almost unattainable, flat load profile with no CPP yields a whopping 2% saving. A more typical two to one, peak to off peak ratio, would result in around a 30% increase in electrical energy cost for the year.
It is obvious the IOU has stacked the rates in its favor. The off peak and shoulder hour incentive price is far too high to be fair or equitable to ratepayers. It clearly shows that Investor owned utilities are not in business to serve customers as the first order of business. IOU's like all, for profit investor owned businesses exist to increase shareholder wealth. Their actions are predominantly prudential in nature and as a whole are skewed towards doing the most possible for the bottom line, which is exactly as, it should be. The IOU's fiduciary responsibility is to its shareholders not its customers.
What is sad is the Public Service Commission did not fulfill its fiduciary responsibility to the citizenry. Approving this rate structure is proof that a group can be clueless and math adverse and still be Utility Commissioners of one of the US most populous states. In defending them, had a water bug been at risk, rather the citizenry, they would have assuredly used greater care.
Ironically, this same state commission denied approval to another IOU for a similar structure last year seeing little if any positive impact to the ratepayers. At least they are inconsistent in making poor decisions and occasionally make a good one.
On the brighter side, it is a challenge to find a Cooperative that's TOU rates look anything like that of the IOU source for the above. The "not for profits" are offering fair and equitable programs with an opportunity to reduce ones energy bill and the Coops future capacity needs. In studying several Coop offerings, the peak was around 6 to 8 hours week days only. All other was time off peak at 40-50% of the fixed rate far below the 93% or 89% of fixed rate for the IOU plan.
There is excess capacity during all nonprime peak hours so capacity should have little value with capacity cost recovery accomplished during the peak hours. The Coop's limited prime peak hours occurred Monday-Friday and were 140-150% of the fixed price very similar to the IOU. A flat load profile would reduce energy bills 40% and following the normal pattern would result in charges equal to fixed prices. Parity with fixed rates for typical customers nicely defines a fair and equitable rate structure.
The Coops definitely own the high ground when looking at these programs. The Coop programs improve equity among different customer socioeconomic groups since the flatter load profiles of low-income customers will result in a lower electrical energy bills compared to the fixed rate coupled with proportionally higher bills for the higher income rungs and their associated larger peak demands while remaining revenue neutral to the Coop.
TOU rates can potentially make large leaps towards fairness and equity while adding incentives to use energy during low demand periods. However, TOU is not a solution in and of itself, improperly scaled it can be used as chicanery to veil a rate increase.
TOU although a positive step still suffers from the averaging effect addressed earlier. Capacity cost are still socialized across all rate payers so lower use and flatter load profiles customers still partially subsidize capacity for the peakier customers. The most equitable way to charge for capacity is to charge for capacity rather than a skewed energy price derivative.
Real Time Dynamic Pricing
The impacts Real Time Dynamic Pricing are difficult to understand, for clarification an imaginary Investor Owned Utility (IOU) will be used to demonstrate the issues with real time dynamic pricing. The imaginary system has a 10,000 MW peak system demand. It has 7,000 MW of base load generation that all in is $50/MWH combined 3,000 MW of intermediate with an all in of $70/MWH. Its final 1,000 MW is diesel peakers at $400/MWH (13,000 heat rate $4/gallon). The system is 11,500 MW to provide a 15% reserve margin. However, a 500 MW coal unit is off to repair a tube leak leaving only a 10% reserve, so 500MW was purchased day ahead at $100/MWH. Carrying the entire reserve requirement from base load and running the diesel peakers flat out the and including the purchase the system average is cost $91/MWH significantly lower than the $400/MWH cost of the peakers.
It is hot and with a minimum of excess generation available, and a trading firm is doing some buying so spot is $1500/MWH. Then a 1,000 MW base load unit has a step increase in furnace pressure and trips. The short fall is purchased on the spot market at an average of $2500/MWH with price ranging from $1500 to $4000/MWH now the system average cost is $336. This buying has further pressured the spot market any more energy will cost $4,000/MWH or more.
The question to answer is what is a fair and equitable real time price? The $4,000 spot price or the $2500 actually paid for the previous block or would the system average of $336 still be a fair number? The position opposed here is the direction that we seem to be heading, that the $4,000 spot is the fair price to convey to ratepayers as real time dynamic pricing.
Would it still be considered fair if it was added that a savvy trading firm got wind of a possible generation issue at a competing firm and made a speculative run on the market driving prices up from $400 to $4000/MWH and is now selling that energy to the our system at an average premium of $2,000/MWH. If the $4000 spot price is used for the real time price, who should receive the $3664/MWH difference between system average and spot price? Would it still be fair if it was added the our imaginary utility was offered an additional 1000 MW the previous day at $150/MWH for a standard 16 hour peak block but declined deciding to pass and run their own peaking units four hours across the peak and let the day play out.
How about the unit on forced outage, is it relevant that the failed tubes having been thinning for a decade and the utility chose to postpone their replacement from the previous spring until the approaching fall? Is it relevant that what seems like a series of errors is likely increasing the quarterly dividend and raising stock prices for the imaginary utility? This is a simple scenario not unlike the real price drivers of weather and equipment failure, what aspect of this did the retail customers have any control over?
It is simplistic to think only in terms of demand or supply; it is not fair to the retail customers to assign them all system risks in the name of valid usage incentives. The only thing they control is their demand, which does not justify them bearing of all risks in the form of electrical energy price spikes. It is neither fair nor equitable to assign them any cost other than those created by their own demand. Ratepayers should not bear the consequences of risks associated with decisions made by others, including the decision not to add capacity or demand side control measures to balance electrical energy supply and demand.
In closing: The industry has a long-standing model for equitable cost assignment, it is the one used almost universally already for industrial customers. The user has two charges one for the capacity used and the other for the energy used. We should use our smart technology to further this functional model to all customers rather than create new elaborate schemes that indirectly charge for capacity through energy price spikes.
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