Courtesy of Smart Grid News, an interesting article on whether smart grids need smart consumers, and – specifically – whether smart customers will need end-use pricing (they will). As FERC Commissioner Philip Moeller recently explained “…the “majority of the benefits of the Smart Grid [will be] at the retail level, when consumers have dynamic pricing.” As the article notes:
“…To many in the electricity industry, the concept of the Smart Grid is incomplete without end-use customer pricing. To as many others, the electricity grid should not involve customer pricing. Fundamental structural and financial differences are behind these conflicting views. What are those differences and how might the grid evolve in the absence of end-use pricing?
Rather than assume customer pricing as a given, and then rehash the discussion of alternative pricing plans (e.g. real-time pricing, critical-peak pricing, time-of-use pricing, etc.), we would do well to take a step back and consider a simple with vs. without paradigm. Because although many of us in the academic and consulting community have assumed some form of the with paradigm, most Smart Grid pilot programs and utility AMR/AMI investments continue without attention to basic rate changes that could influence consumer behavior. The decision of whether or not to include customer pricing may be the single largest determinant of how the Smart Grid evolves, and a grid with customer pricing will look very different than one that lacks it. If we are on the path to without, then it is worth our time to understand the implications of this choice.
A consideration of end-use customer pricing involves three key questions:
1. Consumers’ response and its implications for system planning
2. How much more complex the grid will become, and
3. How the inclusion of customer pricing will be received by regulators
1. Customer Price Response
Customer price response refers to the degree to which consumers change their behavior based on electricity prices.
The Case Against End-Use Customer Pricing
Much ink has been spilled over the years on just how price-elastic consumer demand for electricity really is. The broad conclusion seems to be that customer demand is not very responsive, but that under some conditions (and if provided the right information) customers will respond to changes in price.
More important for system operators is the fact that although consumers will likely respond to prices in some way, it may not necessarily be the way that operators either expect or like. If customer response is going to be modest, utility planners argue, isn’t it better to have emergency control of the grid in their hands (through directly controllable means such as remote AC-control)? With utility control, the argument continues, the system can be managed for the right blend of economic and social goals, including a focus on reducing emissions, lowering prices, and avoiding new builds.
Why Then Should End-Use Prices Be Considered?
Actual experience with customer response to price is, not surprisingly, mixed. In our largest (if unintended) experiment in price variability, the California energy crisis of 2000-2001, we have the clearest example of consumer response to large swings in price from the customers of San Diego Gas & Electric Company. After SDG&E bills began to reflect wholesale market prices, and prices climbed steeply in the summer of 2000, households rapidly reduced electricity consumption by an average of 13%. But when regulators imposed a price cap that September, consumption immediately returned to near its pre-spike level. (An excellent study of the “San Diego experiment,” including a series of graphs that drive home the magnitude of these effects, was published in the Autumn 2008 issue of the RAND Journal of Economics by Peter Reiss and Matthew White.)
While the San Diego example is imperfect in that the experiment was short-lived, it demonstrates that customers will indeed respond to price, and in fact have the potential to be quite responsive in times of system shortages.
2. System Complexity
Developing a system in which consumers respond to price brings added complexity beyond the one in which the utility retains control.
The Case Against End-Use Prices
In the absence of customer pricing, utilities can move ahead with system upgrades to the transmission and distribution networks, including advanced monitoring and new control devices. Add end-use pricing to the mix, and a host of new issues arise for the utilities — from new customer service models to operating agreements with residential-level energy service providers (ESPs). This means greater cost and complexity; it could also mean added time until such a system is deployed and operational. Furthermore, the issue of technology standards becomes more manageable in a world without end-use prices, as additional data standards are needed to incorporate price signals (further increasing cost and complexity).
In Defense of End-Use Pricing
Introducing end-use pricing may increase uncertainty, or change the nature of that uncertainty, but utility planners are experts in dealing with planning (and operating) in uncertain circumstances. The real question is whether the platforms we design for the Smart Grid require more or less information flow with price signals versus with utility control.
The argument on the market side is that there is far less information that must flow: At its simplest and most reductive, price information flows from a central point — the utility or an ESP — to the customer. There need be little reverse data flow since the utility operator or planner should only be concerned about the aggregate behavior of the system, not the behavior of any individual customer.
As for the concern that customer pricing will add to the complexity of standards-setting, the necessary infrastructure may be closer than we realize. The federal government has focused a great deal of its effort to date on the standards and infrastructure portion of the Smart Grid problem, laying the groundwork for future inclusion of pricing.
3. Regulatory Acceptance
State public utility regulators have an enormous role to play in the debate over end-use pricing.
Without End-Use Pricing
From a regulatory perspective, utility control may appear far simpler than allowing the competitive market to work. Experience in nearly every market where prices have been allowed to vary significantly reveals a reflexive response by regulators to cap prices. Regulating the utilities is hard enough without adding the complexity of the market, particularly when that market is regulated by a different entity (the Federal Energy Regulatory Commission). To move to market control may mean to lose control at the state level.
Regulatory Acceptance with End-Use Pricing
Putting aside for the moment questions of whether a system which incorporates end-use pricing is better or not, the trend of policymakers (at least at the Federal level) has been toward systems which incorporate this element.
Count FERC Chairman John Wellinghoff and Commissioner Philip Moeller among those who include end-use pricing in their vision of the future grid. In recent remarks, Commissioner Moeller explained that the “majority of the benefits of the Smart Grid [will be] at the retail level, when consumers have dynamic pricing.”
Other FERC commissioners’ statements reflect similar views, and the Energy Independence and Security Act of 2007 includes a single (albeit oft overlooked) statement on providing time-based price information to customers (even if not prices themselves).
Sensing how the regulatory winds are blowing is difficult at best, and we are certainly not at the point of conflict between the federal and the state regulatory structures. But thoughtful pressure is on the side of price-based systems.
What Lies Ahead?
Let’s be clear: We believe the inclusion of end-use customer pricing into the Smart Grid is an idea with numerous and copious benefits, but these benefits could come with greater cost and complexity.
In practice, Smart Grid upgrades to electricity infrastructure and rate-making principles will not be uniform across the grid, as different utilities and jurisdictions invest in different technologies and market structures. One of the chief decisions that every jurisdiction, and every utility designing a pilot project, must confront is that of what customer pricing structure to use, if any.
The debate will continue, but it is critical for advocates of the Smart Grid to recognize that there is not one shared, unified vision for what the grid will look like. These inherent differences will make for different platforms, information flows and innovations in new product markets.
While it is clear that the dawn of the Smart Grid is upon us, it is less obvious just who will be smart. The smart utility is now being born through advanced monitoring and control devices, but the smart customer will require end-use pricing. The decisions we make in the next one to two years will determine the shape of the consumer end of the grid for a generation. Changing course after starting down a path that includes or excludes end-use pricing will be very difficult, if not impossible.”
You must be logged in to post a comment.