Integrating Dynamic Pricing with Inclining Block Rates
Presented byRyan Hledik
Stanford Energy & Feedback WorkshopHewlett Foundation
Menlo Park, CA
September 5, 2008
2Stanford Energy and Feedback Workshop
Intelligent rate design promotes more efficient electricity consumption
Dynamic pricing• Revolutionizing today’s electricity rates• Pricing pilots are being conducted around the country• Costs of enabling technologies are rapidly falling• States are adopting policies to promote the new rates
Inclining block rates• Do not require new technology• Focus on conservation• Complement dynamic rates
3Stanford Energy and Feedback Workshop
What is dynamic pricing?
Dynamic pricing refers to the family of rates that:
• Vary by time of day• Are “dispatchable”• Focus on reducing peak
demand• More accurately convey
the true cost of providing electricity
Illustration of Residential CPP Rate
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Hour of Day
Rat
e ($
/kW
h)
Existing All-InCPP on Critical DaysCPP on Non-Critical Days
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Several new dynamic pricing experiments have been conducted across North America since 2000
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The pilots have shown that customers do respond to dynamic pricing
Non-Technology Enabled Impacts of Pricing Pilots
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5%
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ario
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ario
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PS
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heim
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ario
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ario
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ario
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tralia
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eren
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eren
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Pricing Pilot
Ave
rage
Red
uctio
n in
Pea
k D
eman
d
TOU CPPPTR
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Enabling technologies facilitate even greater demand response
Role of Technology on Pilot Program Impacts
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PSE&G (TOU) PSE&G (CPP) CA SPP (CPP) AmerenUE-2004(CPP)
AmerenUE-2005(CPP)
Pilot Program
% R
educ
tion
in L
oad
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The potential benefits of dynamic pricing and demand response are significant
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VoluntaryDynamic Pricing
Dynamic PricingStandard
PCT Standard
Automated DRStandard
TotalBenefit
Pres
ent V
alue
of I
ncre
men
tal B
enef
it ($
Bill
ions
)
$1.4 Billion,2.5% Reduction
$4.2 Billion,7.4% Reduction
$1.5 Billion,2.7% Reduction
$1.3 Billion,2.4% Reduction
$8.5 Billion,15% Reduction
With
Sta
ndar
ds
These benefits are driven primarily by avoided investment in newgenerating capacity through peak demand reductions
The Potential Impact of Load Management Standards in California
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The conservation impacts of dynamic pricing are unclear
• Some pricing pilots have suggested moderate conservation impacts
• The California Statewide Pricing Pilot did not find a significant conservation effect
• Long-run conservation effects have not yet been tested
If conservation is the dominant policy objective, inclining block rates are an attractive complementary option…
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Dynamic pricing could be complemented by inclining block rates
Illustration of Inclining Block Rate
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25
0 500 1,000 1,500 2,000
Monthly Consumption (kWh/Month)
Cen
ts/k
Wh
Size of Average Customer
Existing Flat Rate
Inclining Block Rate
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Energy use and customer bills could decrease significantly in response to inclining block rates
Average short run impacts suggested by our simulations:• Consumption reduction ranges from 1% to 6%• Bill savings range from 1% to 9%
Simulated Distribution of Bill Impacts
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nge
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onth
ly B
ill
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Tier 1 Cutoff
Break-even Point
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The way forward is to offer customers a menu of rate options
Risk (Variance in
Price)
Reward (Discount from Flat
Rate)
10%
5%
10.5Flat Rate
RTP
CPP
VPP
Inverted Tier Rate
Seasonal Rate
TOU
More Risk Averse Customers
Less Risk Averse Customers