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.

The news that Comverge has accepted a private equity buyout of roughly $49 million does not come as a surprise to anyone who has been watching this company over the last couple of years and hearing rumors about its financial and resource problems.  According to The Wall Street Journal, a recent filing with the Securities and Exchange Commission reported that Comverge’s independent auditor had expressed serious doubt as to whether the company could continue to operate due to lack of cash flow and debt-related issues.

The buyout by the private equity firm H.I.G. Capital will address these immediate financial and liquidity problems, allowing Comverge to continue its operations and to execute its strategic plans.  H.I.G. Capital is offering Comverge shareholders $1.75 a share well below its 52-week high at $5.09.  The Comverge board has approved the definitive agreement, which enables the company to seek other offers during a so-called 30-day “go-shop” period. As of the close of trading on March 26, the stock was up at $1.79 indicating that investors are expecting a higher offer.

Despite its financial woes, Comverge still runs a viable demand response (DR) business.  As one of the largest curtailment service provider (CSP) and outsourcer of residential DR programs in the country, Comverge had $136.4 million in annual revenues in 2011, representing a 14% increase from the previous year’s revenue of $119.4 million. Moreover, the company added more than 800 new megawatts (MW) under management and increased adoption of its enterprise software platform, IntelliSOURCE, with 22 utilities.  Comverge was also chosen by Gulf Power to double the country’s largest residential dynamic pricing program from approximately 8,000 to an expected 16,000 participants over the next four years.  Perhaps most important was Comverge’s recent $27 million international deal with Eskom, the largest electricity provider in Africa, to create and co-manage its first open market for DR resources.

Despite these achievements, which resulted in the company’s best performance ever, it was apparently not enough.  As Comverge’s president and chief executive officer, R. Blake Young, noted on March 15:  “Despite the strongest operational and financial performance in the company’s history, we still require capital to fund our operations, and the Board and management are working diligently on strategic alternatives for obtaining the required capital and financing.”

Pike Research does not believe that Comverge’s financial issues mean that the DR market is in trouble.  Some observers have claimed that the major CSPs are reaching their saturation level, having to seek new market opportunities in order to continue to grow their business. This does not indicate a lack of interest among end-users to participate in DR programs.  Indeed, both Comverge and EnerNOC have been able to increase their customer base as well as MW under management in 2011.  Although it may become tougher to recruit new customers once the low-hanging fruit is picked, there is still ample opportunity in the United States and in other countries to grow a DR business.  Let’s not forget that DR is more than just curtailing loads during peak events; it can accomplish a lot more as it addresses all the different ways that a utility, grid operator or CSP balances supply and demand of electricity by responding to the needs of the grid.  And with the increasing application of automated DR (Auto-DR) by utilities around the world to make it more cost-effective, more reliable, more predictable, and easier to  execute demand response than ever before, the growth prospects look strong.