Navigant Research Blog

Dynamic Pricing Moves From Theory to Practice

— December 10, 2013

Dynamic pricing is one of the key elements of the smart grid proposition.  Efficient market signals provided through dynamic pricing allow consumers to adapt their behavior to grid conditions and utilities to balance the grid while integrating a growing amount intermittent renewable energy.  Consumers are also promised lower electricity costs as they optimize their usage, and energy companies avoid having to pass on the costs of new infrastructure investments.  Completing this virtuous circle, dynamic rates incentivize consumers to adopt sophisticated energy management systems and smart appliances that can automatically control household loads in response to energy prices and grid conditions.

Dynamic rates can be seen as part of a continuum of rate structures that have time-based components.  These include time-of-use (TOU) rates, demand response (DR) programs, and other event-based incentive structures.  However, true dynamic rates that vary according to grid or market conditions introduce another level of flexibility in terms of matching energy supply to demand.

Slow Ahead

Thus it’s important to assess the progress being made toward the provision and adoption of dynamic tariffs for electricity.  While the theoretical arguments for dynamic pricing may be strong, their actual implementation is progressing slowly.  According to Navigant Research’s Dynamic Pricing report, despite considerable pilot activity, less than 1% of U.S. consumers currently have access to dynamic rates.  Moreover, that number is not expected to rise significantly over next 2 or 3 years.  According to the report, without a change in approach, less than 1% of U.S. consumers are likely to be on dynamic pricing programs by 2020.

Progress in this market is impeded by strong counter-forces, including consumer advocacy groups concerned about the impact of lower-income customers, utilities worried about disruption to existing business models, and regulators wary of taking a lead on the introduction of new rates.

This caution has wider implications. Many of the DR programs currently being trialed in Europe, for example, depend on sophisticated dynamic pricing models that can help balance an energy supply heavily dependent on distributed renewable energy.  Regulatory drivers in Europe may be different, but there is still uncertainty about consumer response and the ability to deliver programs that meet the needs of all stakeholders.

Dynamic pricing’s role in energy demand management is also mirrored in other parts of the cleantech market.  One of the principal motivations for many cleantech innovations is to account for the true cost of the resources we use and to design pricing models appropriately.  The transport sector, for example, is seeing a growing interest in pay-as-you-go models for road use charging as well as more flexible tariffs for parking.  The lesson from the energy market is that dynamic pricing may be theoretically attractive, but it is also highly disruptive of established businesses models and consumption patterns: moving from interesting pilots to large-scale availability will not be automatic.


Utilities Turn to Dynamic Pricing

— October 1, 2012

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 Class Warfare of Dynamic Pricing

— 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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