Transcript Slide 1

BRINGING DYNAMIC PRICING TO
THE MASS MARKET
Ahmad Faruqui, Ph. D.
NARUC Winter Meetings
Washington, D.C.
February 19, 2007
The demand response imperative
•
Electricity capacity margins are projected to fall below minimum
levels in several areas in the next 2-3 years
• Electricity rates are likely to go up
• Rising capacity costs
• Rising fossil fuel prices
• Climate Change
• We don’t have time to build our way out of this problem
• Customers should be given the ability to control their usage,
ensuring that the lights stay on and their bills come down
• AMI and dynamic pricing can help
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However, not every customer is on AMI, nor is every AMI
customer on dynamic pricing
• Regulators and utilities are concerned about AMI costs, the
perceived “rate volatility” associated with dynamic pricing, and the
related potential for customer and political backlash
• In attempts to ensure rate stability, regulators and utilities forgo the
benefits that dynamic pricing can bring in the form of reducing
customers’ energy bills
• In the eastern PJM region, a load drop of 3% in the top 100 hours of
only 5 utilities would yield customer benefits of $275 million per year
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Under traditional ratemaking, bills will rise for 50% of the
customers who choose dynamic pricing
Distribution of Bill Impacts
20%
Electricity Bill Increase (Decrease)
15%
10%
5%
0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
-5%
-10%
Customers with Flatter Consumption
Customers with Peakier Consumption
-15%
Percentile of Customer Base
4
100%
That fear may keep customers from even trying out the new
rates
• And fear of that fear may keep us from even offering dynamic pricing
to customers, since we are anxious to “protect the customers from
themselves”
• How do we break out of this bubble?
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Flat rates embody an implicit but very real risk premium that
insures customers against price volatility
Probability Distribution of Risk Premium
8%
3% risk premium
6%
5%
4%
3%
2%
1%
0%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
22%
24%
26%
28%
30%
32%
34%
36%
38%
40%
42%
44%
46%
48%
50%
52%
54%
56%
58%
60%
62%
64%
66%
68%
70%
Probability of Occuring
7%
Risk Premium
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By crediting customers for the risk premium, dynamic
pricing rates become attractive for 70% of customers
Distribution of Bill Impacts
20%
Revenue Neutral
Electricity Bill Increase (Decrease)
15%
Risk Adjusted
10%
5%
0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
-5%
-10%
-15%
Customers with Flatter Consumption
Customers with Peakier Consumption
-20%
Percentile of Customer Base
7
100%
With demand response, dynamic pricing becomes attractive
to over 95% of customers
Distribution of Bill Impacts
20%
Revenue Neutral
Electricity Bill Increase (Decrease)
15%
Risk Adjusted
Load Shifting
10%
5%
0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
-5%
-10%
-15%
-20%
Customers with Flatter Consumption
Customers with Peakier Consumption
-25%
Percentile of Customer Base
8
100%
With creative ratemaking, we can bring the benefits of DR to
millions of customers
Impact on Four Representative U.S. Utilities
2,500
MW or Millions of 2007 Dollars
MW
2,000
$
1,500
MW
$
1,000
MW
$
500
MW
$
0
Large
Southeastern
Large
Western
Midsize
Mid-Atlantic
9
Small
Midwestern
Additional reading
• Brattle Group, The. “Quantifying the benefit of demand response for PJM,”
prepared for PJM Interconnection LLC. and MADRI, January 2007
• Faruqui, Ahmad. “Breaking out of the bubble: how dynamic pricing can
mitigate rate shock,” Public Utilities Fortnightly, March 2007, forthcoming
• Federal Energy Regulatory Commission (FERC), The US. Demand Response
and Advanced Metering, Staff Report, August 2006
• North American Electric Reliability Corporation (NERC). “2006 Long-Term
Reliability Assessment,” October 16, 2006.
• Plexus Research, Inc., Deciding on Smart Meters, Edison Electric Institute,
September 2006.
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Contact information
Ahmad Faruqui, Ph. D.
Principal
The Brattle Group
353 Sacramento Street, Suite 1140
San Francisco, CA 94111
Voice: 415.217.1026
Fax: 415.217.1099
Cell: 925.408.0149
Email: [email protected]
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