Integrating Dynamic Pricing with Inclining Block Rates

Presented byRyan Hledik

Stanford Energy & Feedback WorkshopHewlett Foundation

Menlo Park, CA

September 5, 2008

2Stanford Energy and Feedback Workshop

Intelligent rate design promotes more efficient electricity consumption

Dynamic pricing• Revolutionizing today’s electricity rates• Pricing pilots are being conducted around the country• Costs of enabling technologies are rapidly falling• States are adopting policies to promote the new rates

Inclining block rates• Do not require new technology• Focus on conservation• Complement dynamic rates

3Stanford Energy and Feedback Workshop

What is dynamic pricing?

Dynamic pricing refers to the family of rates that:

• Vary by time of day• Are “dispatchable”• Focus on reducing peak

demand• More accurately convey

the true cost of providing electricity

Illustration of Residential CPP Rate

0.0

0.2

0.4

0.6

0.8

1.0

1.2

0 2 4 6 8 10 12 14 16 18 20 22 24

Hour of Day

Rat

e ($

/kW

h)

Existing All-InCPP on Critical DaysCPP on Non-Critical Days

4Stanford Energy and Feedback Workshop

Several new dynamic pricing experiments have been conducted across North America since 2000

5Stanford Energy and Feedback Workshop

The pilots have shown that customers do respond to dynamic pricing

Non-Technology Enabled Impacts of Pricing Pilots

0%

5%

10%

15%

20%

25%

30%

Ont

ario

- 1

Ont

ario

- 2

SP

P

PS

EG

Ane

heim

Ont

ario

- 1

Ont

ario

- 2

Ont

ario

- 1

Ont

ario

- 2

SP

P

Aus

tralia

Am

eren

- 04

Am

eren

- 05

Pricing Pilot

Ave

rage

Red

uctio

n in

Pea

k D

eman

d

TOU CPPPTR

6Stanford Energy and Feedback Workshop

Enabling technologies facilitate even greater demand response

Role of Technology on Pilot Program Impacts

0%

5%

10%

15%

20%

25%

30%

35%

40%

PSE&G (TOU) PSE&G (CPP) CA SPP (CPP) AmerenUE-2004(CPP)

AmerenUE-2005(CPP)

Pilot Program

% R

educ

tion

in L

oad

No TechnologyTechnology

7Stanford Energy and Feedback Workshop

The potential benefits of dynamic pricing and demand response are significant

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

VoluntaryDynamic Pricing

Dynamic PricingStandard

PCT Standard

Automated DRStandard

TotalBenefit

Pres

ent V

alue

of I

ncre

men

tal B

enef

it ($

Bill

ions

)

$1.4 Billion,2.5% Reduction

$4.2 Billion,7.4% Reduction

$1.5 Billion,2.7% Reduction

$1.3 Billion,2.4% Reduction

$8.5 Billion,15% Reduction

With

Sta

ndar

ds

These benefits are driven primarily by avoided investment in newgenerating capacity through peak demand reductions

The Potential Impact of Load Management Standards in California

8Stanford Energy and Feedback Workshop

The conservation impacts of dynamic pricing are unclear

• Some pricing pilots have suggested moderate conservation impacts

• The California Statewide Pricing Pilot did not find a significant conservation effect

• Long-run conservation effects have not yet been tested

If conservation is the dominant policy objective, inclining block rates are an attractive complementary option…

9Stanford Energy and Feedback Workshop

Dynamic pricing could be complemented by inclining block rates

Illustration of Inclining Block Rate

0

5

10

15

20

25

0 500 1,000 1,500 2,000

Monthly Consumption (kWh/Month)

Cen

ts/k

Wh

Size of Average Customer

Existing Flat Rate

Inclining Block Rate

10Stanford Energy and Feedback Workshop

Energy use and customer bills could decrease significantly in response to inclining block rates

Average short run impacts suggested by our simulations:• Consumption reduction ranges from 1% to 6%• Bill savings range from 1% to 9%

Simulated Distribution of Bill Impacts

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

100

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1,00

0

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01,

300

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500

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01,

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2,00

0

Customer Size (kWh/month)

Cha

nge

in M

onth

ly B

ill

No Price ElasticityWith Price Elasticity

Tier 1 Cutoff

Break-even Point

11Stanford Energy and Feedback Workshop

The way forward is to offer customers a menu of rate options

Risk (Variance in

Price)

Reward (Discount from Flat

Rate)

10%

5%

10.5Flat Rate

RTP

CPP

VPP

Inverted Tier Rate

Seasonal Rate

TOU

More Risk Averse Customers

Less Risk Averse Customers