How will dynamic pricing actually happen?
- Posted on June 26, 2012
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An op-ed piece in Monday's Charleston (West Virginia) Gazette struck me as one step in the process of enacting dynamic pricing and reminded me of two other conversations I've had recently.
In Monday's op-ed piece, "Electrical Grid Demands Smarter Approach," Andy Ott, senior vice president of markets at PJM Interconnection, explained to readers that PJM—the regional transmission organization serving much of 13 Eastern states—has composed market rules to favor "price responsive demand." Essentially, this is enabling linkage between wholesale prices and retail prices, providing the means for dynamic pricing and its benefits.
The advantages of dynamic pricing allow retail customers to respond to price signals and, if equipped with information and tools, to better manage their overall use. The response to peak pricing—dampened demand—should allow utilities (PJM's customers) to defer capital investment in peaking power plants that only run a fraction of the year but stand-by at great cost to all.
David O'Brien, director of regulatory strategy for the Bridge Energy Group Inc., made several points around the same theme in an interview yesterday. We'll bring you an in-depth interview with O'Brien next week. And Roger Levy, of Levy Associates, suggested to me earlier this year that, among other things, expensive and innovative customer information systems (CIS) from third parties will be needed to enable dynamic pricing. (Some of Levy's remarks may be found in the following article links.)
My own coverage of this issue can be traced as I reported on industry discussions in several columns over the past year, beginning with "Dynamic Pricing Now!," "Dynamic Pricing: It's Complicated" and "Customers Need Energy Data First."
For now, back to Ott's op-ed piece. His thesis, familiar to all, particularly in this summer season:
"Today, most consumers pay fixed prices for each kilowatt-hour of electricity they use," Ott wrote. "These prices stay the same throughout the day and don't reflect the wholesale price that suppliers actually pay to buy electricity. That wholesale price changes every hour.
"These fixed retail electricity prices encourage the use of electricity when costs are the highest and the grid is most stressed, as on a hot summer day when air conditioning use is high.
"The Smart Grid can offer a more efficient pricing structure."
Ott continued that smart meters + smart thermostats = automated response to price signals during peak cost periods, saving consumers money and enabling utilities to defer capital investments in peak-power plants. Check!
In his words:
"At PJM Interconnection ... we're working [on] an approach called price responsive demand (PRD).
"PRD recognizes that electricity consumption would fall by a predictable amount when variable real-time prices rise. Federal regulators recently approved PJM's plans for applying this more efficient pricing structure to help bring Smart Grid benefits to the PJM region.
"Price responsive demand won't just benefit consumers by helping them pay lower electricity prices. It can also ease stress on the electric grid and ensure its reliability. Homes and businesses would respond to wholesale prices by reducing their usage when electricity demand and prices were high.
"The two-way communication between home-based automated systems and electricity suppliers could also aid in both short- and long-term forecasting of the electricity needed to meet demand.
"Such efficient use of the grid can delay the need for expensive new generating plants or transmission infrastructure. And that spells savings for power companies and consumers alike."
"By empowering consumers and businesses to respond to changes in real-time wholesale electricity prices, Smart Grid-driven approaches like price responsive demand and flexible rate options can enhance the reliability and economic efficiency of the electric system, help the environment by managing energy consumption, and save money."
PJM's move with PRD is one step en route to "dynamic pricing now!" as my naïve if spirited exhortation would have it. Utilities and regulators in PJM's 13-state territory need to follow through and make dynamic pricing happen for their customers. Those customers will need smart meters and smart thermostats to benefit.
In that sense, Ott answered my call in a column earlier this month, "Crossroads 2012: Meters and the Future," for a power industry executive to explain to the public why interval meters are needed to achieve the full benefits of grid modernization.
Now it's up to utilities and regulators in PJM's 13-state region to follow through with both deployment of interval meters and the application of dynamic pricing.
Intelligent Utility Daily
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