Using real-time prices for electricity that reflect the marginal cost of electricity at different times of the day is the ideal method to capture the true cost of producing energy.  As a result, dynamic pricing offers an opportunity for utilities to expose consumers to price signals through a better representation of the actual price of power.  Dynamic pricing is the ultimate goal of demand response.

Dynamic pricing could eventually become the most common load curtailment method for utility customers – residential ones as well as commercial and industrial customers.  In fact, it may usher in a whole new way of dispatching DR.  Instead of the traditional practice of dispatching DR a dozen times or so a year, for 3 to 4 hours per incident, DR programs with dynamic pricing can now be designed to call an event numerous times, for very short durations.  With dynamic pricing schemes, such as critical peak pricing, utilities will start to rethink their residential rate plans and dispatch strategy.

Signals, Responses

Despite their strong value proposition, dynamic pricing programs, which depend on real-time interval data and two-way communication systems, are still in their infancy.  But a growing number of utilities are conducting pilots to eventually provide such options to their end-use customers.  For example, after a successful pilot, Oklahoma Gas & Electric (OGE) plans to reduce demand by 210 megawatts over the next 3 years, by introducing dynamic pricing programs to about 150,000 residential and small commercial customers.  Each participating customer will receive an Energate smart thermostat that can respond to price signals, according to the customer’s preferred settings.  Customers with a smart meter will have access to 15-minute interval data through a web portal.

Curtailment service providers (aggregators) are also preparing to meet the growing demand from their utility clients to support dynamic pricing programs.  One of the largest aggregators for the residential DR market, Comverge, which serves over 1 million residents, recently announced a new dynamic pricing solution, SmartPrice.  This integrated hardware and software product suite enables utility customers to take advantage of various price-response DR programs and to access data on their energy use and information about real-time energy prices on the Comverge Web portal, via an in-home display, on one of the company’s smart thermostats, or on the consumer’s own mobile device or tablet computer.  Most important, consumers will also be able to set control schedules for load curtailment of their high-energy use appliances when energy prices are high.  In this way, SmartPrice gives consumers more choice as well as control, not to mention savings on their utility bills.  Moreover, by delivering DR signals via the Internet, Comverge can reach those small and mid-sized utilities that have not yet deployed an advanced metering infrastructure (AMI) system.

While automated DR offers benefits to both consumers and utilities, particularly increased efficiency, reliability, and predictability, the combination of automation with dynamic pricing will significantly help utilities reduce peak demand.  Most likely, it will also help induce consumers to enroll in and stay actively engaged with DR programs, since they can achieve meaningful savings on their utility bill by participating in dynamic pricing programs.  That’s why many observers, such as The Brattle Group, argue that dynamic pricing will help the utility industry justify the substantial investments they have made in new smart grid technologies.