Dynamic pricing now!
- Posted on December 5, 2011
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With advanced metering infrastructure (AMI) deployments rapidly proceeding, utilities need to implement dynamic pricing programs, which AMI is designed to enable.
And in the absence of further federal resources devoted to grid modernization—a current, political and economic reality—the cost of many research-and-development opportunities should be borne by the power industry.
Both these points were made by a panel at The National Press Club yesterday in Washington, D.C., that discussed myriad issues familiar to the industry if not the public and national press.
The panel presented a new report from a team under the auspices of the Massachusetts Institute of Technology, "The Future of the Electric Grid," which offered an assessment of and recommendations for grid modernization.
You can peruse the report on your own time, as it's nearly 300 pages long. Here I'll treat some remarks from the presentation and the question-and-answer session that followed. Note that many if not most of the issues identified by MIT have been standard fare in our coverage over the past two years in which the study took place.
With the "peakiness" of the load curve increasing—historically with the pervasive spread of air conditioning—anything that can shave or shift the peak to reduce the need for new power plants is a good thing, the panel said.
But the implementation of AMI, which makes price signals possible for dynamic pricing programs, has not been followed by such programs, the panel pointed out. The current impasse offers "an incredible learning opportunity" to discover how dynamic pricing can be made palatable to consumers.
Lisa Wood, executive director of the Institute for Electric Efficiency, asked the panel how the industry could move forward with dynamic pricing programs. (Recall Wood argued for implementations over pilot projects in our Industry Expert column titled, "Time to Move Beyond Pilots.") Currently, only Oklahoma Gas & Electric (OGE) has a substantial number of customers (about 20 percent) on dynamic rates, Wood said, pointing to the commitment of OGE Energy's CEO Peter Delaney, local consumer advocates and the state's public utilities commission.
"If you deploy AMI, it makes no sense to sit on your heels," agreed panelist Nancy Rose, professor of applied economics at MIT.
Due to the risk-averse nature of the power industry and its regulators, Rose said, "baby steps" that follow innovative utilities such as OGE will be crucial, as will the sharing of outcomes from dynamic pricing pilots and constructive engagement of customers.
"Don't conflate resistance to 'smart' meters with resistance to dynamic pricing," Rose added.
I asked the panel, which met in Washington, D.C., through a webcast interface, "To what degree should the recommendations you make be initiated by regulators and to what degree by the market and consumers?"
"The recommendations on transmission planning and cyber security are matters for public policy for the industry," answered Henry "Jake" Jacoby, professor of management emeritus, MIT. "The things that Nancy [Rose] is talking about are things that need to be done largely by the industry itself, with the support they can get from their [state] regulators. Almost everything we've talked about here is a mix of government, regulatory and policy instruments, the entities that run the system and their consultants. It's a mix of everybody."
"One thing that makes our study a little different from many studies of technology that have research implications," added Richard Schmalensee, professor of economics and management at MIT, "is we think that the research that needs to be done ... are not big ticket items. These are not multi-billion dollar items that the DOE [Department of Energy] needs to fund. If in coming years federal research dollars in these areas are constrained, we expect that the things we call for are not beyond the industry's means. They're not a big stretch and thus they probably could be and should be industry funded."
Other ideas espoused by the panel:
- "Consumers have to feel that their [electricity usage] data will be kept private. That's a problem to be managed, not solved," the panel said.
- State regulators should require utilities to compile and publish standardized metrics for cost and reliability for public review and as the basis for rate case evaluations.
- The power industry's regulatory framework is due for an overhaul, but the study did not call for fundamentally overhauling the regulatory regime in place since the 1930s.
- Outcomes from projects funded by the American Recovery and Reinvestment Act should be widely shared to get the most bang for the buck.
- There's "no perfect protection from cyber attacks and we have to learn to live with that [fact]," the panel said. But there's no national oversight of cyber security for the distribution system or for the grid as a whole.
My big take-away: utilities need to propose and regulators need to approve more ambitious dynamic pricing programs. Consumer advocates, including AARP, are concerned about the impacts of peak-related price spikes that could impact vulnerable populations such as the elderly and those requiring medical equipment. (We'll hear more from that camp soon in another column.) But regulators involved in moving to retail electricity competition have touted safeguards such as default rates to address those concerns.
Unfortunately, the current and growing backlash against "smart" meters has the potential to derail dynamic rate programs and the industry's inability to accurately and clearly convey the "smart" meter value proposition does not bode well for the MIT panel's recommendation on the next step.
For arguments that run counter to utilities' interests, read:
- "Smart Meters: Who Said What?!"
- "Smart Meters = Tip of the Iceberg"
- "Vermont and the Opt-out Provision"
- "Dynamic Pricing Gurus Needed"
- "Dynamic Pricing Alert!"
- "A Reader: Dynamic Pricing Destroys Jobs?"
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