Navigant Research Blog

The Class Warfare of Dynamic Pricing

Bob Gohn — November 4, 2011

Dynamic pricing for electricity has long been the holy grail of the smart grid, particularly for smart metering.  The rationale is that if the retail price of electricity actually reflected the true time-based costs instead of a blurred monthly average, then consumers would become more efficient buyers, benefiting themselves, suppliers, the environment, and society.  If we can choose to buy less during demand peaks when generation costs are highest, and buy more when the grid is underutilized, then overall electricity bills will go down, peak demand is reduced, and the associated environmental impacts are lessened.  Everyone wins – so who’s to complain?

Well, quite a few consumer interest groups are complaining, ranging from the AARP to utility watchdog groups.  While some complaints fit within the ongoing smart metering paranoia, there are legitimate concerns as well, including:

  • Low-income, elderly, and other disadvantaged groups may not be able to shift to off-peak use, and hence may face higher bills. Images of grandma turning off her oxygen, shivering in the cold or sweating out a heat wave because of smart meters are persuasive.
  • There is a general assumption that consumers will happily make “comfort vs. cost” tradeoffs in energy use.  This is counter to the trend toward flat rate pricing elsewhere, including the telecom industry, heretofore the master of time-of-use pricing.
  • While there is little argument against “opt-in” dynamic pricing programs, most agree that dynamic pricing must be mandatory or implemented as an “opt-out” program to achieve the desired benefits. This muddles the message of enabling “consumer choice” via smart metering.

Underlying all these concerns is an assumption that for someone to win with dynamic pricing, someone else has to lose.  The goal may be to reduce demand peaks and fill underutilized valleys, effectively lowering the average, but it is true that some will likely pay more with dynamic rates.  The question is who?

Interestingly, opposition to dynamic pricing can be found on both ends of our politically polarized spectrum. Those toward the right fear Big Brother taking control of their thermostats and appliances (here, utilities = government). Those bent leftward see the social good of universal electricity being corrupted, leaving the vulnerable unprotected (here, utilities = big business).  I am sure smart grid advocates would love to unite Tea Party and Occupy Wall Street folks, but not this way!

These complexities abounded last week when I attended the New England Restructuring Roundtable, a group that since 1995 has been meeting several times a year to discuss “revolutionary changes in the electric power industry in Massachusetts and throughout New England.”  This meeting included a terrific panel of leading utilities, regulators, and consultants on the topic of smart grid and dynamic pricing. Among these were Oklahoma Gas and Electric (OG&E), which has an impressive smart grid program underway, and Ahmad Faruqui of The Brattle Group, presenting evidence from a multitude of dynamic pricing pilots.  The data show that not only does dynamic pricing work, but there are clear guidelines for how “dynamic” the pricing should be, and how consumer technology enhances the benefits.


Much of the Q&A centered on the “Who wins, who loses?” question.  What I think has been missing from the broader debate, is the question, Who wins/loses in the status quo of average rates?  Clearly heavy peak users are effectively being subsidized by everyone else.  Efficient users are subsidizing inefficient users. Using class-bias stereotypes, McMansion-owning consumers running heavy-duty HVAC systems, pool filters, and hot tubs regardless of peak periods are being subsidized by other, less power-hungry ratepayers, including grandma just trying to stay warm (or cool).

In this context, consumer advocates should be clamoring for the “peakers” to “pay their fair share.”  And more capitalistic types should welcome systems that make energy a free market with more consumer choice and effective pricing mechanisms.  Of course, programs are likely needed for disadvantaged groups, but this is nothing new.  And there is evidence that even low-income consumers are often able to respond to dynamic pricing incentives and share in the benefits.

Ultimately, regulators and legislators, armed with increasingly better data from pilots and carefully considered consumer protections, will need the courage to drive dynamic pricing implementation.  With smart meter deployments now reaching critical mass, technology will no longer be an obstacle.  And perhaps fairness and markets will converge toward the same goal.

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