Dynamic energy pricing: will the public buy in?

17 June 2014 (Last Updated June 17th, 2014 18:30)

Smart technologies are facilitating new ways to make electricity bills fairer and the grid more stable. But schemes such as real-time pricing represent a complex new frontier that brings risk as well as reward. With little mainstream awareness of these innovative new options, will customers ever buy into the concept?

Dynamic energy pricing: will the public buy in?

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Between the development of renewable energy, smart grid technology and big data, the face of the energy sector is beginning to change after a long period of relative symmetry. While the steady growth of integrated renewables and new energy storage options are opening up the generation side of the equation, the increasing use of smart meters and domestic wireless tech has opened the door to new, data-driven possibilities for consumers at the other end of the energy supply chain.

One such area with room for improvement is the price of electricity. With rising energy prices consistently a cause for friction between utilities and their customers - the mass outrage over British Gas's 10.4% hike on electricity bills in the UK last October is a prime example - the need for alternatives to the standard pricing model feels more pressing than ever.

Dealing with inequality in energy pricing

After all, the traditional fixed-rate tariffs may provide simplicity and a veneer of equity between consumers, but from the perspective of individual energy users, the system actually promotes inequality. A flat rate across all consumers sounds fair on the face of it, but in reality the customers who tend to use energy during off-peak times of the day, when prices are cheaper, are essentially subsidising those who primarily power their appliances with the most expensive peak electricity.

Now that smart metering and data tracking in the power sector have matured to a sufficient degree, these technologies are facilitating innovative, dynamic pricing options that reward consumers who avoid heavy usage during the peak of demand.

The clearest form of dynamic pricing is real-time pricing (RTP), under which customers are usually given an hour-by-hour breakdown of electricity costs for the next day so they can take advantage of low-cost energy during off-peak hours. Where the complexity of the RTP model once limited its use to larger industrial and commercial users, the rise of home-based smart metering has made it feasible for the residential market too.

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On paper, it's a win-win. Customers get the chance to take control of their energy usage, which has been shown to improve domestic energy efficiency and bring considerable savings on monthly bills. On the other side of the coin, utilities gain operational and financial benefits from deploying RTP by reducing their peak load during the periods of highest demand and mitigating the risk of supply shortages, the effects of which were keenly felt in the California electricity crisis of 2000 and 2001, which caused sky-high prices and large-scale blackouts.

Referring to the crisis, US National Bureau of Economic Research academic Severin Borenstein noted in a 2009 essay that the traditional pricing model made matters worse. "Virtually all economists agree that the outcome was exacerbated by the inability of the demand side of the market to respond to real or artificial supply shortages," he wrote. "This realization prompted my research stream on real-time electricity pricing."

Slow progress for innovative pricing

Given the purported advantages of dynamic pricing models, it's perhaps surprising that smart-tech enabled alternatives are making such slow progress among consumers. Even in the US, where utilities have been particularly active in offering variable pricing schemes to their customers, there have been mixed results in terms of gaining traction in the market. Georgia Power, one of the industry's RTP pioneers, is a success story, with its RTP programme comprising around 60% of all non-residential RTP buyers in the US. But mass buy-in from the general public - small-scale residential users - is still a long way off.

The US state of Illinois became one of the country's leading lights for RTP in 2006, when its General Assembly passed legislation requiring any utility serving more than 100,000 customers to provide an option for residential real-time pricing. The state's main utilities, ComEd and Ameren Illinois, both introduced full-scale RTP programmes in 2007, but since then less than 1% of the utilities' customers have made the leap, reflecting the RTP concept's inertia elsewhere in the US, and around the world.

RTP is picking up sustained interest globally, but most projects are in the early stages. One of Norway's largest energy producers, Nord-Trøndelag Elektrisitetsverk (NTE), announced in March 2014 that it would partner with Swedish ICT company Maingate to run a pilot project gauging customers' feelings on real-time fluctuating electricity prices. Under the pilot, 35 homes have installed a system giving residents access to minute-by-minute data on their energy usage so they can reduce their consumption during peak morning and afternoon periods. NTE believes customers can use RTP to reduce their bills by 15% without sacrificing comfort, a stat backed up by anecdotal evidence from the RTP schemes in Illinois.

"Dynamic pricing rewards consumers who avoid heavy usage during the peak of demand."

A similar project in the UK called Solent Achieving Value from Efficiency (SAVE) recently received £8.3m in funding from Ofgem's Low Carbon Network Fund to find out how much customers could save using "energy efficiency technology" in their homes, as well as to investigate any savings utilities could make from reducing the need for electric network upgrades.

Projects like these represent an important first step in proving RTP and other dynamic pricing technologies, as well as in judging the public's reaction to them. But when the basic infrastructure to implement these kinds of changes has been readily available since the early '90s, when Georgia Power first started rolling out RTP, the fact that, in 2014, many authorities are only just starting to study the basics of this type of model is a stark illustration of the sluggish pace of progress.

Exposure to risk

If utility adoption and public participation in dynamic pricing models has been surprisingly slow when the advantages seem so clear, the natural question to ask is why. Well, as is usually the way, reality makes the energy pricing issue far more complex than it would appear on paper.

Fundamentally, schemes like RTP rely on a baseline level of engagement and commitment from the home consumer to be successful. The big advantage of flat-rate electricity tariffs is their simplicity - the cost of electricity doesn't change on an hour-by-hour basis, and when prices go up customers have a convenient scapegoat in the form of nefarious utilities.

Under a pure form of dynamic pricing like RTP, the rewards for customers can be great, but there are risks, too. For switched-on consumers, monitoring hourly energy prices and adapting their schedules to match up with the best deals is demonstrably achievable, but what about the rest of us - the many millions of users who don't consider factors such as peak load when they're running their washing machines and electric heaters?

RTP facilitates smart energy usage, but it exposes less attentive consumers to higher bills than they had previously. In essence, are customers prepared to make the lifestyle changes necessary to make use of more innovative price schemes? This question is part of the reason why even RTP progressives like those in Illinois are stressing that dynamic pricing should, for now at least, remain strictly optional. And then there are those for whom engagement isn't an issue, but who have energy needs that are time-inflexible. Many users, such as the elderly or those dealing with chronic illness, could be vulnerable to increased bills if a scheme like RTP was made the default option.

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Tech enablers

The continuing development of automation and other smart technologies are cited as essential to simplify schemes like RTP for consumers. These include real-time updates pushed to tablets and laptops, as exist today, as well as more innovative ideas. In Illinois, for example, the Load Guard programme allows RTP customers who own their homes and have central air conditioning to alternate their AC on and off in 15 minute increments to save energy during peak periods.

"Without automating technologies it is difficult for customers to respond to prices on an hourly basis - response tends to happen at a less granular level," wrote Bratton Group principal Ahmad Faruqui in a report on dynamic pricing for the Australian Energy Market Commission. "This combined with load inflexibility or a lack of consumer attention leads to increased bill risk for consumers."

Although RTP is probably the purest form of dynamic energy pricing, a host of other options in this area further fragment the market. Other pricing structures such as time-of-use rates, which divide the day into periods with pre-determined prices, or peak-time rebates, which keep flat rates but offer customers compensation for energy saved at peak times, are all viable alternatives to the alternative.

In short, dynamic pricing schemes, to one degree or another, sacrifice simplicity in order to empower the customer to create their own value. But the slow rate of adoption of these programmes around the world suggests that the mainstream customer base isn't yet ready to take power into its own hands.

Then again, the real point of alternatives like RTP might be to provide new price-cutting options for the customers who can be bothered to make the effort - after all, mass adoption of RTP would surely lead to a flatter energy price landscape through the reduction of peaks, returning the market to a situation similar to flat rates, but without the certainty. In this transitional period for the power sector, perhaps it's better to let dedicated consumers cut their electricity bills before residential renewables and distributed generation take off, the importance of centralised utilities diminishes and the whole issue is rendered moot.

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