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10 Ways to Make DynamicPricing Work

Residential

dynamic

pricing canwork for

customers as

well as the

utility—here’s

how.

Katherine Tweed

June 19, 2012

There was a lot of finger-pointing about why residential

dynamic pricing can’t gain a foothold in the United States

during a recent Restructuring Today webinar called

“Resurrecting the Money-Saving Promise of Residential

Dynamic Pricing.”

Most of the fingers pointed straight at utilities. But after decades

of inaction, researchers, consumer advocates and consultants

have found common ground on how to bring residential

dynamic pricing -- rather than just critical peak rebates -- to the

masses. Here is their advice:

1. Build trust. “The well is kind of poisoned,” said Nancy

Brockway, former New Hampshire PUC chairperson and

principal at NBrockway & Associates. But that doesn’t mean that

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utilities can’t change. There is evidence that low-income and

elderly consumers will actually benefit even more than the

average person from dynamic pricing, so get the right

consumer groups on board from the beginning, said Ahmad

Faruqui, principal of The Brattle Group. Step one should be to

bring stakeholders to the table.

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 utility’s ability to engage consumers

on their level, noted that she had not actually seen a lot of the

data from pilots that address low-income residents and

dynamic pricing. Faruqui agreed that consumer advocates

should be entitled to look at the data from pilots, which circles

back to the first point of building trust.

3. Become the Orbitz of electricity. Utilities in competitive

environments like Texas could benefit by becoming a place

where people can shop for the best dynamic pricing rate, the

way people shop for travel and insurance online, according to

Peter Honebein, co-founder of Customer Performance Group,

a consulting firm with utility clients. Clearly, this doesn’t work in

a fully regulated environment, but even regulated utilities can

offer calculators or pricing wizards to help customers find thebest rate based on their usage. “We need to orchestrate the

dynamic pricing experience,” says Honebein, which means

blending goals and feedback through the pricing scheme.

4. Make sure there are training wheels. When Baltimore Gas

& Electric was seeking approval for its smart grid plans, one

element 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. The

key is to have price guarantees, under which for at least the first

year, and maybe up to three or even five years, consumers will

not pay more than they would have on the flat rate. If the entire

U.S. had digital meters and dynamic pricing, the cumulative

savings would be $7 billion, according to Faruqui. The key is

who sees those savings -- and it should be customers, not just

shareholders.

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5. Provide insurance options. Similar to training wheels, there

should be an opportunity for people to protect themselves,

according to Paul Centolella, former chairman of the Ohio

Public Utility Commission. Besides bill protections, consumers

should be able to choose different options based on their risk

preference. For instance, when the market price exceeds the

strike price, he said, the customer could earn a rebate for using

less energy. Centolella also called on regulatory innovation to

enable pricing schemes like this. “Regulation needs to

encourage technological and business model innovation,” he

said. “In organized markets, the economic rationale for

regulating price signals is largely unnecessary today.”

6. Move beyond the pilot. Faruqui is an academic, and

decades ago, he told a colleague that there is tremendous value

in pilots. Now, he’s not so sure. “The time has come to stop thepilots,” he said. “We’ve been doing pilots and little else for 30

years.” Many in the industry share his frustration. Arizona Public

Service has more than half of its residential customers on

dynamic pricing. Oklahoma Gas & Electric is going to move

150,000 customers to voluntary dynamic pricing. Brockway,

who was skeptical about mandatory dynamic pricing, agreed

that 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.

7. Make it opt-out, not opt-in. Similar to offering insurance

options, there should be an option for customers to opt out,

said Faruqui. Although APS has more than 50 percent of its

customers on dynamic pricing, an opt-in program realistically

has a 25 percent or maybe 30 percent acceptance rate. With

opt-out, however, people who don’t see any benefit after theirfirst year on the program (with bill protection) could go back to

their flat rate.

8. Set the right ratio. At Toronto Hydro, there is only a few

cents' difference between the on- and off-peak rates. The result

is that people barely shift usage, because there isn’t a strong

enough 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

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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 the

hottest hours in summer. Even though $0.35 per kilowatt-hour

sounds ludicrous for summer in Arizona, people steadily sign up

for the plan, and the average homeowner saves 5 percent of

their bill annually. Research has found that a 10:1 ratio can get

about a 20 percent peak reduction, and more if you add in

smart thermostats. “Price matters,” urged Faruqui, “and

electricity is no exception.”

9. Educate regulators. Just like everything else relating to

utilities, educated and informed regulators are essential to

change. Here is where rules No. 2 and No. 6 apply. Good data

needs to be shared with regulators, and there should be a

robust plan to move quickly beyond a pilot and into full

deployment, in whatever form that is that works to meet thegoals of the utility. Selling something to regulators is not only

good business for the utility, but is also good for customers.

“Regulatory support alone doesn’t make a sustainable business

model,” warns Brockway.

10. Tell, don’t sell. So let’s say the regulators are on board,

along with consumer groups. That still leaves the little problem

of how the information is presented to customers. Someutilities, like Pacific Gas & Electric, shows customers different

rate options online. But Honebein noted that means the

customer has to already have an account then go to that

webpage. And if you want to try out a new plan, it’s still multiple

clicks away. “There’s no button that says ‘Just sign me up,’” he

noted. “We have to help customers understand whether they’re

better off [on a different plan].” This requires nudging, with a

dash 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,” said

Honebein.

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

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