The Potential of Dynamic Pricing to Shave Peaks

Published: Thu 20 Jun 2013
A blog entry by Sasha Bermann

Contributed by:

Sasha Bermann
Chief Dissemination Officer
VaasaETT

Sasha Bermann's Blog

In practice the effect of prices are twofold: They generate revenue to the receiving part and they shape the behavior of the paying part. As this is the case dynamic prices are a potential tool for shaping customer behavior in the energy market, for example for the purpose of shaving peaks of consumption. In markets where there is only a single tariff or flat tariff, pricing signals are obviously not available as a tool for shaving peaks of consumption. However in some markets pricing signals which better reflect marginal costs of electricity are used to influence consumption behaviors. At peak time the supply and distribution cost goes up and so does the price and the opposite naturally happens outside of peaks. Therefore it rewards customers for the electricity they do not use at peak times while penalizing them for the electricity they use at such times. Customers can benefit from dynamic pricing by switching off appliances and by deferring certain household activities to off-peak periods (typically laundry, dishwashers, lower electric heating and air conditioning, etc.) when prices are lower than they would otherwise be on a flat standard tariff. Their participation is rewarded financially through reduced energy bills due to shifting activities to lower price periods and reduced cross subsidies as the price of electricity better reflects its cost but also by feeling like they are being “Green” and are doing the “right thing”. However there are multiple ways of using dynamic prices, each scheme different than the others and with different results. The most common schemes are Time-of-Use (TOU), Critical Peak Pricing (CPP), Critical Peak Rebate (CPR) and finally Real-Time Pricing (RTP). 

TOU tariffs induce people into using electricity during times when consumption is lower. Prices are therefore set higher during high consumption periods, typically during working hours, and lower during the rest of the day each day. TOU prices can be offered in combination with CPP or CPR pricing schemes.

CPP pricing schemes involve substantially increased electricity prices during times of heightened wholesale prices caused by heightened consumption (for example on very hot days) or when the stability of the system is threatened and black-outs may occur. In exchange for a lower tariff during non-peak hours (compared to customers on say single tariffs), participants agree to have substantially higher tariffs during critical peak hours. The number and length of critical peak periods which the utility is allowed to call is often agreed upon in advance in order to lower participant risk. The periods when critical peaks occur depend on conditions in the market and cannot be decided in advance. Residential customers are usually notified the day before that the next day will be a critical day.

CPR pricing schemes are inverse forms of CPP tariffs. Participants are paid for the amounts that they reduce consumption below their predicted consumption levels during critical peak hours. 
 

In RTP schemes the price paid by participants is tied to the price of electricity on the wholesale market. In order to encourage reductions during high price periods and reduce risk of high bill, participants are warned when wholesale prices reach a certain threshold decided upon in advance.

SOURCE: VAASAETT
 
However, as previously mentioned these schemes produce different results; some more successful than others. The figure above shows how successful a specific scheme is when it comes to shifting consumption away from peak times to off peak times. The figure does exclude the effects of appliance automation. TOU and RTP peak consumption reductions are the lowest but they occur daily while CPP produce the highest reductions but only for critical peak periods. Finally CPR seems slightly less effective, but it has a bigger potential for being accepted by consumers, since they have nothing to lose. 
 
Research has shown that consumers react mainly to changes in the price of electricity rather than to the price of electricity. Consumer’s reaction to the increase in electricity prices at peak is therefore usually best measured using multiples of the base prices, i.e. the ratio of peak price to base price. It is interesting to note that in TOU and CPP pilots the price ratio is less important in terms of peak clipping when combined with consumption feedback. Consumers subjected to CPR pilots usually receive a payment after each critical peak period or see their electricity bills lowered by the same amount. This has the advantage of making the results of their efforts perhaps more concrete than the concept of savings, which might be less easily perceived. 
 
All data presented in this article stems from the Empower 1 report written by VaasaETT, global energy think tank and supported by ESMIG. 

 

The sample size of the individual pilot types for the price schemes are as follows: TOU (215), CPP (69), CPR (16), RTP (15).

Stromback, J., Dromacque, C. and Yassin, M. H. (2011). The potential of smart meter enabled programs to increase energy and systems efficiency: a mass pilot comparison. Prepared for ESMIG. VaasaETT Global Energy Think Tank. Available online at:<http://www.esmig.eu/press/filestor/empower-demand-report.pdf>.