Cleantech Market Intelligence
It’s a Small World (for Dynamic Pricing) After All
Disney recently unveiled surge pricing for its theme parks, meaning that tickets will cost more during holidays and on some weekends—up to 20% more—than during slower periods as the near-capacity parks seek to spread out demand. When Mickey Mouse announces this strategy, it’s hailed as a brilliant business move. So why is it that when utilities try to roll out dynamic pricing options, it is assumed it will lead the elderly and orphans to swelter in the heat and sit in the dark?
Dynamic pricing exists in many aspects of society, such as with airline tickets, theater and sporting event tickets, subway fares, and road tolls. The basic concept is that the value of a product varies based on time, demand, and other factors, so being able to charge prices that better reflect that value is more economically efficient than simply charging an average flat price across all hours and variables. Makes sense, right?
In the electricity industry, the concept of dynamic pricing for mass-market customers is fairly recent (aside from time-of-use rates). With the proliferation of advanced meters that can record usage at small intervals, more types of dynamic pricing can be applied down to the residential level.
The key drivers for advancing dynamic pricing include technical, policy, and economic factors such as:
- Advanced metering infrastructure (AMI): Without the 15-minute interval data provided by smart meters, or AMI, dynamic pricing programs cannot accurately be implemented. Smart meters are now seeing more widespread deployment, which further enables the market for dynamic pricing.
- Utility and customer costs: Offering a dynamic pricing program to reduce peak demand may be cheaper for a utility than building a peaker plant to meet increased demand. On the customer side, electric bills can be reduced by modifying consumption behavior. In the long run, all ratepayers should see lower rates than they otherwise would due to the increased capacity factor and avoided infrastructure costs.
- Enabling technologies: Devices such as smart thermostats, smart appliances, and associated home energy management applications are becoming more commonplace, allowing consumers to more easily manage their energy demand.
- Distributed energy resources (DER): As DER capacity from resources like energy storage and electric vehicles grows, so does the ability to shift load and enjoy the cost savings from dynamic pricing programs.
However, the slow rate of dynamic pricing program development points to the depths of the barriers to such growth:
- Reliable service concerns: Utilities understand how important reliability is—especially for at-risk residential customers, including low-income customers, the elderly, families with young children, and the disabled—and seek to provide a resilient grid that operates disruption-free. Without proper education about the program, dynamic pricing rates could potentially send a harmful signal to these at-risk groups.
- AMI integration: Systems integration plays a huge role in the success of AMI techniques and poses a significant cost to utilities. Ensuring AMI provides flexible and extensible solutions is paramount.
- Lack of customer education and demand: Customer understanding of dynamic pricing is low. Unlike other energy management strategies that focus on different aspects of energy consumption, dynamic pricing depends on modulating customer habits, which may be hard to change.
There are several examples of utilities implementing successful dynamic pricing programs, such as Baltimore Gas and Electric, Oklahoma Gas and Electric, and Sacramento Municipal Utility District. These topics and more are covered in Navigant Research’s new report, Dynamic Pricing. Perhaps learning about dynamic pricing from Disney will lead more people to embrace it in other parts of their lives.