Courtesy of The Harvard Business Review blog, an interesting comment on the importance of dynamic retail pricing. As readers know, we are advocates of fully functioning “smart markets” to activate smart grids and smart meter deployments, and this regulator’s views are at least a step in that direction. As the article notes:
“…Electric utilities need game-changing innovations to meet unprecedented challenges and manage large-scale investments under uncertainty. Serving on the Public Utilities Commission of Ohio, I support and see an increasing focus on innovation among utility regulators. The next major innovation will be the expansion of dynamic retail pricing.
Today most consumers are charged a flat rate for every kilowatt hour they consume. They are billed monthly. And, despite wholesale power costs that can be as much as ten times higher during peak hours than at other times, consumers have little idea which energy uses cost the most. This would be equivalent to receiving your grocery bill weeks after you visited the market and being charged the same price for each item, whether you bought chewing gum or caviar. One consequence is that the power system must be engineered to meet virtually any demand and accommodate any contingency.
A series of pilot programs suggest that with more accurate price signals, appropriate information feedback, and technology to help manage their energy use, residential consumers would cut their peak demand by more than thirty percent and reduce their overall electricity consumption. Additionally, interoperability standards soon will enable appliances and other devices to respond automatically to changing electricity prices. And, the extension of home and building area networks to these devices will allow third-party entrepreneurs to offer innovate energy and information services.
Allowing consumers to see and respond to dynamic retail electric rates — price signals that reflect changing power costs — can drive down costs and provide consumers meaningful choices. However, fear of higher bills in peak months could slow such reforms. This concern can be addressed through innovative rates which include option purchases, such that consumers will earn rebates if they use less energy during peak periods than the quantity on which their rate is based.
Dynamic default or opt-out rates will be essential to engaging large numbers of consumers. New consumer behavior studies are testing combinations of such rates with automation, information feedback, and simple messages regarding savings, empowerment, sustainability, and shared responsibilities. Their success will be key to demonstrating that a smart grid is an effective substitute for more costly investments in new generation and distribution capacity.
Without such innovation, consumers will face higher costs:
Global development is driving up power plant costs: Global demand for power and resources has been a key factor in doubling the cost of new power plants over the last decade. For the best-capitalized utility serving my state, adding one 1,000MW baseload coal or nuclear power plant would increase their total generating capacity by less than three percent, but could cost more than 22% of its market capitalization to build.
Energy security concerns are moving transportation to electric vehicles: With OPEC controlling nearly 80% of world oil reserves, the addition of hundreds of millions of new car owners in countries such as China and India could increase oil prices, accelerating the adoption of plug-in vehicles by U.S. consumers. If electric vehicle charging is not intelligently managed, it will require major upgrades to electric distribution systems.
The electric infrastructure is aging: Meeting demands of a growing population and replacing old facilities could require $1.5 trillion of investment in the U.S. power system over the next twenty years. Up to half of existing coal-fired generation could retire before 2020. There is an urgent need to decide how to address the resulting shortfall in capacity.
Reducing carbon emissions could require rapid transformation in a capital intensive industry: Given the difficulty of controlling some agricultural and industrial emissions, meeting international targets will require largely de-carbonizing the electric sector in less than forty years.
As a regulator, I cannot ignore the impact of these challenges on the ability of utilities to finance conventional business strategies. A smart grid that enables dynamic pricing could reduce investment requirements, facilitate cost-effective electric vehicle charging, allow high penetrations of wind and solar energy, lower carbon emissions, elicit demand changes that improve system reliability, give consumers greater control over their electric bills, and provide incentives for innovation.”
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