It’s Time for Time-of-Use Pricing for Residential Customers

Dynamic pricing schemes are viewed as one of the key utility tools for reducing peak load during the summer, which is growing over time. Such pricing schemes, which adjust the price of electricity based on the time of day and the cost of generating electricity during different time periods, are on the rise throughout the United States.

Such schemes come in a number of different flavors, including time-of-use (TOU) pricing (the most common), critical peak pricing (CPP), real time pricing, and others. The idea is to create a financial incentive for end users to shift portions of their energy consumption from peak times to off-peak times. When these programs result in demand reductions, utilities can more easily manage power generation assets, transmission, and delivery, ultimately making electricity as a whole less expensive to produce.

The commercial sector, characterized by large, centrally-managed electricity-consuming equipment and flexible electricity use schedules, has been the main beneficiary of dynamic pricing to date. The residential sector, in contrast, has been harder to penetrate for a number of reasons.

At least one of the barriers to dynamic pricing in the residential sector – a lack of advanced metering infrastructure – is set to change in the near term. By 2013, over 90 percent of residential customers in Texas will be served by smart meters and a number of other states have comparably aggressive plans underway. Without smart meters, dynamic pricing is impossible to implement (with the exception of night-and-day meters, which are less common). As smart meters penetrate residential end-points, a growing candidate pool of residential customers will be in a position to opt into TOU pricing and other schemes.

Some of the other barriers may be more difficult to address in the short term, but industry experts are optimistic that they will be addressed. One is the perception that the relatively small size of customer electricity accounts and the small difference between today’s static electricity prices and off-peak electricity prices under TOU schemes will leave customers with little incentive to switch to dynamic pricing schemes voluntarily.

I recently had the chance to catch up with Ahmad Faruqui, president of the Brattle Group, on this very topic. His group’s analysis of dynamic pricing pilots around the United States has found that customers do, in fact, respond to dynamic pricing schemes and have been able to save money as well as reduce system load as a whole. Within pricing schemes, critical peak pricing tends to yield the most dramatic peak load reductions.

Still, dynamic pricing schemes have been slow to take off. Many utilities offer them. For example, PG&E, SCE, and SDG&E all offer opt-in time of use pricing to customers. In Texas, retail electricity providers (REPs) including TXU, Reliant, and Nations Power offer TOU or real-time pricing plans. But customer uptake of these programs has remained slow despite the energy saving potential.

As advanced metering infrastructure is rolled out on a broader scale and as increasingly savvy customers look to save money on energy bills through dynamic pricing, we’ll see more interest in these programs.

Article by Eric Bloom, appearing courtesy the Matter Network.