10 Ways to Make Dynamic Pricing Work _ Greentech Media

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<ul><li><p>PREVIOUS ARTICLERedwood SystemsOpens Platformfor...</p><p>NEXT ARTICLE"Equal Pay" for</p><p>DemandResponse...</p><p>10 Ways to Make DynamicPricing Work</p><p>Residentialdynamicpricing canwork forcustomers aswell as theutilityhereshow.</p><p>Katherine Tweed June 19, 2012</p><p>There was a lot of finger-pointing about why residentialdynamic pricing cant gain a foothold in the United Statesduring a recent Restructuring Today webinar calledResurrecting the Money-Saving Promise of ResidentialDynamic Pricing.</p><p>Most of the fingers pointed straight at utilities. But after decadesof inaction, researchers, consumer advocates and consultantshave found common ground on how to bring residentialdynamic pricing -- rather than just critical peak rebates -- to themasses. Here is their advice:</p><p>1. Build trust. The well is kind of poisoned, said NancyBrockway, former New Hampshire PUC chairperson andprincipal at NBrockway &amp; Associates. But that doesnt mean that</p><p>ARTICLES: GRID OPTIMIZATION</p></li><li><p>utilities cant change. There is evidence that low-income andelderly consumers will actually benefit even more than theaverage person from dynamic pricing, so get the rightconsumer groups on board from the beginning, said AhmadFaruqui, principal of The Brattle Group. Step one should be tobring stakeholders to the table.</p><p>2. Share the data. There is solid data from pilots, but unless itfinds its way into all stakeholders hands, it is useless. Brockway,who was very skeptical of a utilitys ability to engage consumerson their level, noted that she had not actually seen a lot of thedata from pilots that address low-income residents anddynamic pricing. Faruqui agreed that consumer advocatesshould be entitled to look at the data from pilots, which circlesback to the first point of building trust.</p><p>3. Become the Orbitz of electricity. Utilities in competitiveenvironments like Texas could benefit by becoming a placewhere people can shop for the best dynamic pricing rate, theway people shop for travel and insurance online, according toPeter Honebein, co-founder of Customer Performance Group,a consulting firm with utility clients. Clearly, this doesnt work ina fully regulated environment, but even regulated utilities canoffer calculators or pricing wizards to help customers find thebest rate based on their usage. We need to orchestrate thedynamic pricing experience, says Honebein, which meansblending goals and feedback through the pricing scheme.</p><p>4. Make sure there are training wheels. When Baltimore Gas&amp; Electric was seeking approval for its smart grid plans, oneelement was squarely rejected: mandatory time-of-use pricing.But there are ways to carefully put every house on time-of-usepricing without infuriating everyone in the service territory. Thekey is to have price guarantees, under which for at least the firstyear, and maybe up to three or even five years, consumers willnot pay more than they would have on the flat rate. If the entireU.S. had digital meters and dynamic pricing, the cumulativesavings would be $7 billion, according to Faruqui. The key iswho sees those savings -- and it should be customers, not justshareholders.</p></li><li><p>5. Provide insurance options. Similar to training wheels, thereshould be an opportunity for people to protect themselves,according to Paul Centolella, former chairman of the OhioPublic Utility Commission. Besides bill protections, consumersshould be able to choose different options based on their riskpreference. For instance, when the market price exceeds thestrike price, he said, the customer could earn a rebate for usingless energy. Centolella also called on regulatory innovation toenable pricing schemes like this. Regulation needs toencourage technological and business model innovation, hesaid. In organized markets, the economic rationale forregulating price signals is largely unnecessary today.</p><p>6. Move beyond the pilot. Faruqui is an academic, anddecades ago, he told a colleague that there is tremendous valuein pilots. Now, hes not so sure. The time has come to stop thepilots, he said. Weve been doing pilots and little else for 30years. Many in the industry share his frustration. Arizona PublicService has more than half of its residential customers ondynamic pricing. Oklahoma Gas &amp; Electric is going to move150,000 customers to voluntary dynamic pricing. Brockway,who was skeptical about mandatory dynamic pricing, agreedthat utilities need real-world successes, not just pilot examples.The only way to get there is to roll out innovative pricingprograms and market them to customers.</p><p>7. Make it opt-out, not opt-in. Similar to offering insuranceoptions, there should be an option for customers to opt out,said Faruqui. Although APS has more than 50 percent of itscustomers on dynamic pricing, an opt-in program realisticallyhas a 25 percent or maybe 30 percent acceptance rate. Withopt-out, however, people who dont see any benefit after theirfirst year on the program (with bill protection) could go back totheir flat rate.</p><p>8. Set the right ratio. At Toronto Hydro, there is only a fewcents' difference between the on- and off-peak rates. The resultis that people barely shift usage, because there isnt a strongenough price signal. OGE has an hourly range from $0.045 to$0.23, and $0.46 per kilowatt-hour for critical peak.At Salt River</p></li><li><p>Project in Arizona, customers pay as little as $0.07 per kilowatt-hour in off-peak, and up to $0.35 per kilowatt-hour in thehottest hours in summer. Even though $0.35 per kilowatt-hoursounds ludicrous for summer in Arizona, people steadily sign upfor the plan, and the average homeowner saves 5 percent oftheir bill annually. Research has found that a 10:1 ratio can getabout a 20 percent peak reduction, and more if you add insmart thermostats. Price matters, urged Faruqui, andelectricity is no exception.</p><p>9. Educate regulators. Just like everything else relating toutilities, educated and informed regulators are essential tochange. Here is where rules No. 2 and No. 6 apply. Good dataneeds to be shared with regulators, and there should be arobust plan to move quickly beyond a pilot and into fulldeployment, in whatever form that is that works to meet thegoals of the utility. Selling something to regulators is not onlygood business for the utility, but is also good for customers.Regulatory support alone doesnt make a sustainable businessmodel, warns Brockway.</p><p>10. Tell, dont sell. So lets say the regulators are on board,along with consumer groups. That still leaves the little problemof how the information is presented to customers. Someutilities, like Pacific Gas &amp; Electric, shows customers differentrate options online. But Honebein noted that means thecustomer has to already have an account then go to thatwebpage. And if you want to try out a new plan, its still multipleclicks away. Theres no button that says Just sign me up, henoted. We have to help customers understand whether theyrebetter off [on a different plan]. This requires nudging, with adash of creative marketing. If regulators will allow it, try somesegmented marketing and different plans to see what sticks.Trying things out and making it observable is key, saidHonebein.</p><p>TAGS: demand response, dynamic pricing, efficiency, energy efficiency,general electric, peak pricing, policy, renewables, silver spring networks,smart grid, time of use pricing, tou pricing, utilities</p></li></ul>