In today’s Wall Street Journal, Rebecca Smith writes about changes under way in California (sub. req.) that would enable the three investor-owned utilities to offer their customers sophisticated digital meters and pricing options. The initiative that Smith describes is the culmination of a joint PUC/Energy Commission effort over the past three years to explore ways for the demand side to have more of a voice and a role in their electricity consumption choices. Of particular interest is the extent to which residential and small commercial customers would respond to the option of facing variable pricing for the electric power service they receive.
To this end, the PUC and the Energy Commission authorized a Statewide Pricing Pilot, in which approximately 2,500 small customers had one of several options:
-a time-of-use (TOU) price, with all peak hours having a price 70% higher than non-peak hours
-a critical peak price (CPP) over a fixed peak period and with day-ahead notification when the CPP rate applied
-a CPP over a variable peak period and with day-ahead notification
As part of the pilot digital meters and programmable thermostats were installed for those customers, which they could program as they saw fit and change remotely over the Internet.
The final report on this pilot was released in late March. Its introduction states clearly the role that supply/demand interaction plays in retail markets, and how that interaction influences wholesale markets:
California experienced a major power crisis in its unregulated wholesale markets during 2000 and 2001. The crisis was exacerbated by the lack of dynamic pricing in retail markets, which would have given customers an incentive to lower loads during peak times. One of the unknowns in implementing dynamic pricing is whether and by how much customers would reduce peak loads in response to dynamic price signals.
To help address this uncertainty, California’s three investor-owned utilities, in concert with the two regulatory commissions, conducted an experiment to test the impact of time-of-use (TOU) and dynamic pricing among residential and small commercial and industrial customers. (p. 4)
The pilot’s results suggest a statewide average reduction in peak-period energy use of 13.1 percent. This result is consistent with those observed in Gulf Power’s variable pricing program and in the Energy Smart Pricing Plan in northern Illinois. A 13 percent reduction in energy use from these small customers in peak hours can mean the difference between normal operations and a blackout. Furthermore, in the California pilot small customers cut their peak energy use precisely when the risks of such failures are highest – on critical days during the hottest summer months.
Another important result of the California pilot comes from the CPP pricing plan with variable peak periods. Customers on that pricing plan and with the smart, enabling technologies reduced their peak-period energy use by 27 percent, more than double the effect of the other CPP plan. The study indicates that customer access to the enabling technology, combined with pricing that reflects cost differentials over time, created the opportunity for them to change their behavior. And they did so, to a larger extent than is commonly believed possible for residential and small customers.
In today’s Wall Street Journal article, Ms. Smith describes a story of one customer who had the enabling technology but did not find it worth the bother, so she just turned off her air conditioning when she left for work in the morning. This story misses the point. The point is that even a small number of customers making small behavioral changes can make a big difference, the difference between a blackout and normal operations, with economic incentives and (increasingly inexpensive) enabling technology. Ms. Smith’s interviewee need not be one of those people, but there are others who do find it worth the bother. It’s unfair to them to shut them out, and to prevent them from taking actions that benefit them and the system as a whole. But that’s precisely what fixed, regulated retail rates do.
This pilot program is a first step in rectifying those unfair impediments to demand participation in retail electricity markets. While the critical peak pricing plans tested in California do not present customers with the opportunity to choose from a portfolio of contracts, it is a constructive first step in that direction, a further demonstration that, as Severin Borenstein says at the end of the article, there’s a lot of price responsiveness at the residential level.