Sunday, June 27, 2010

Post # 26 - The Debate Over Dynamic Pricing Moves to Ohio

A key smart grid debate revolves around whether, once their customers have access to real-time pricing information, utilities should institute “dynamic” or “time-differentiated” pricing. That debate has raged in many localities where smart meters are being installed. A chapter in that debate is now taking place in Ohio.

Under dynamic pricing, customers pay different prices at different times – prices that, at least in theory, reflect system conditions. This contrasts with “flat rate” pricing, under which customers pay the same price for each kilowatt-hour they consume power, without regard to the time of day or electric system conditions,

Supporters of dynamic pricing claim these programs have the potential to save customers money and reduce utilities' costs. Dynamic pricing advocates say consumers generally will adjust their use of power if they are equipped with information about the true cost of their energy. And if people are financially incented to reduce consumption during peak periods (the argument goes), this lessens both utilities’ needs to build costly new power plants to cover times of peak energy demand and their overall emissions of greenhouse gases.

Conversely, consumer advocates tend to take a more cautious view, fearing that utility customers who sign up for dynamic rates without knowing how to take advantage of them – for example, those lacking the education or skills to correctly read and incorporate smart meter information or those unable to afford smart appliances – could end up paying more for their power than under the present flat rate regimes.

Concerns over the impact of dynamic pricing on low income customers led to the moratorium on smart meter installation earlier this year in the Australian state of Victoria (see Post # 11). Likewise, the impact of dynamic pricing has been a concern of consumer advocate in states such as California as utilities have begun to install smart meters,
see here and here, as well as Post # 25 on the BGE smart meter decision in Maryland.

Late year, American Electric Power’s Ohio subsidiary successfully sought federal stimulus funding for fifty percent of the cost of a $150 million smart grid demonstration project. The demonstration program, kicked off last December, involves the installation 110,000 smart meters, testing of plug-in hybrid electric vehicles, and energy-efficient appliances.

AEP’s smart meter installation, involving 110,000 residential and retail customers in Ohio’s Northland region (a 150-square area encompassing parts of Columbus and other communities), is now complete. The next item on the company’s agenda is to offer those smart meter customers the option of rates that vary based on the actual time of usage, as opposed to flat rates. AEP has asked the Public Utilities Commission of Ohio to authorize a time-differentiated rate option. PUCO staff indicates that the commission could act on AEP’s request within the next several weeks.

AEP says a typical household uses about 11,000 kilowatt hours per year. Under the company’s time-differentiated rate program, the per-kilowatt-hour charge for participating customers who avoid using air conditioners and other appliances between 1 p.m. and 7 p.m. from June through September would drop by 68 percent for all power used during the other 18 hours of the day (and all day on weekends) – a reduction from 10.4¢ per kilowatt hour under the current flat-rate plan down to 3.36¢.

On the other hand, for participating customers who do not -- or cannot -- avoid using power during the peak periods, the time-differentiated rate jumps to 25.62¢ per kilowatt hour – or 146 percent more than what they would be paying on the current flat-rate plan.

So here are some issues that the PUCO likely will be addressing (albeit, in the context of an optional program):

  • Will this combination of smart meter “discounts” and “penalties” change consumer behavior, and to what degree?
  • Will those consumers adept at using their smart meters to manage the time periods they purchase power actually be subsidized by those consumers who lack that ability or inclination?
  • Will time-differentiated rates lead to reductions in AEP’s generation during traditional peak periods?
  • To what extent should the results of this pilot rate program serve as a metric for regulatory decisions aboutmandatory dynamic pricing?
Again, the AEP program is an optional program. But, if authorized by the PUCO, the outcome will clearly impact long-term debate over dynamic pricing – and not just in Ohio.

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