The recent announcement of billions of dollars of federal funding for smart grid demonstration projects is of particular interest to people who have been involved in thinking about how modernizing the electric grid can bring new benefits to consumers. Many projects awarded have a dynamic pricing option that gives customers access to an electric rate that varies across each day, and provides incentives to manage peak electric demand; and some projects feature a real-time pricing model based on the wholesale electricity market prices. For these projects to truly benefit consumers, it is essential to think about dynamic pricing from the consumer’s point of view.
The recent announcement of billions of dollars of federal funding for smart grid demonstration projects is exciting news for everyone, and of particular interest to those of us who have been involved in thinking about how modernizing the electric grid can bring new benefits to consumers.
In reviewing the descriptions of projects that have been funded, many include a dynamic pricing option that gives customers access to an electric rate that varies across each day and provides incentives to manage peak electric demand. Some projects even include a real-time pricing model based on the wholesale electricity market prices.
At CNT Energy, we have spent over seven years learning how residential customers respond to and perform on real-time pricing. Our results have been extremely encouraging. Participants save money and reduce both peak electric demand (which stresses the electric grid) and total consumption. What’s more, they really like it. We are still learning about the most effective ways to persuade customers to leave the traditional flat electric rate that residential customers and generations past have had for the past one hundred years and enable them to become smart managers of their energy use. But, it is clear to us that once they do, everyone benefits.
However, there are several reasons that I am nervous about this large increase in the availability of dynamic pricing. One of our key findings has been that it is essential to think about dynamic pricing from the consumer’s point of view. That means several things.
First, the core design of any new dynamic rate structure must have value for consumers. This means that while we are interested in getting customers to reduce energy use during the few peak price times, it is only worthwhile to the customer if their peak time costs are more than offset by low electricity prices at many other times. If you let basic laws of supply and demand in the electric markets work then this will be the case. However, utility rate-making often finds ways to nickel and dime customers to the point where they end up on a rate that charges high prices but not low ones. But this isn’t inevitable. Consumer advocates and regulatory agencies need to work with utilities to develop new dynamic pricing options that provide real value to consumers, not just price shocks.
Second, the rate has to be friendly. Traditionally, utilities are not very good at marketing new services to customers. Just compare your utility bill or other information that you receive from them to what you get from a more dynamic one like the cellular industry. “Friends and Family” and “Nights and Weekends” phone plans are a lot easier to understand than a long complicated tariff sheet that includes references to critical peak periods, demand charges and lots of terms, conditions and disclaimers. Utilities tend to think that these types of rate sheets are what they should provide to customers, but they tend to be nearly impossible for customers to understand and riddled with terms that sound intimidating or just plain scary. We don’t need to hide the details, but we need to articulate what we are doing in ways that people can understand. Again, this sort of confusion isn’t inevitable, but we need to build a new type of relationship between utilities and consumers. This has to involve utilities learning a whole new way to talk to – and listen to –their customers.
Third, there will be ups and downs. In our work with real-time pricing in Illinois, we’ve had far more ups than downs. We have had short periods when energy prices were high and customers had higher bills, but we’ve had many more times when they saved money because of they had access to lower prices. Giving customers smart meters and new rates will change their monthly bills. If introduced correctly and paired with the right high-quality education and information tools, customers will make the adjustment. If done wrong, customers won’t understand the changes and will be angry about having to pay for new technologies that they don’t see benefiting them. Regulators and others will have to be diligent that the introduction of smart meters and new rates is well managed and that any transitional hiccups are not overblown. Over the long term, getting this right is essential for introducing new energy efficiency options and integrating plug-in hybrid electric vehicles into the grid and energy markets. We don’t want to squander that opportunity.
As utilities around the United States speed up the introduction of dynamic pricing for consumers, both through investments made with the funding announced yesterday, and through other initiatives, we have an enormous opportunity to transform how households understand and mange their energy use. Our experience in Illinois can clearly suggest one way to do this. We worked hard to involve all points of view, gaining the support of consumer advocates and environmentalists and as well as the utilities and regulators. And we worked hard to develop dynamic pricing programs which benefit the customer. When we hear stories from participants, like the lady who came home to find her kids watching TV in the dark, having turned off the lights because they saw electricity prices were a bit high, we know that we are heading in the right direction. The next generation is learning how to be smarter about how they manage their energy use.
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