I’ve written a lot here before about dynamic pricing, and Mike has too. Electricity is one of the most poorly-priced services we consume; only water is priced in a way that communicates even less about its scarcity and about the true costs of providing the service. If we are going to meet the combined challenge of rising electricity demand, environmental quality, and cost minimization, implementing dynamic retail pricing of electricity is crucial. Without dynamic retail pricing, we will continue to invest in expensive and underutilized generation and wires resources to meet peak demand, peaks that could be reduced using the price signals inherent in dynamic pricing.
Smart grid technologies, including communicating digital meters, enable this dynamic pricing by reducing the costs of communicating price signals to more and more consumers. Smart grid technologies also enable the communication of more varied and diverse information, in addition to reducing the costs of communication.
I’ve written a short article on the symbiotic relationship between smart grid technology and dynamic pricing in the Smart Grid Newsletter, which is a great resource for smart grid information.
Dynamic pricing is one of the most valuable direct consumer benefits enabled by a Smart Grid. Dynamic pricing makes the value and cost of their energy use transparent to consumers, and it enables consumers to see when cost exceeds value. Dynamic pricing particularly benefits consumers whose consumption is flexible; however, it does not harm the inflexible customer because it reduces the quantity of peak power demanded, thereby reducing average prices paid by inflexible customers. When dynamic pricing reduces peak demand, it also reduces transmission and distribution losses, and associated operating costs.
The rest of the article focuses on how the combination of smart grid technology and dynamic pricing can deliver environmental benefits.