The Power of Dynamic Pricing

Abstract

As the Smart Grid takes shape, it opens new vistas for change. One of those salient opportunities for change that is enabled by the Smart Grid is the pricing of electricity. By and large, existing rate designs hide the temporal variation in the cost of electricity and thereby promote over-consumption of electricity during peak times and under-consumption during off-peak times. In much of North America, the problem is especially pronounced during the top 60-100 hours of the year which may account for as much as 10-18 percent of system peak load. In order to meet this critical peak load, expensive combustion turbines are purchased and installed, raising rates for all customers. Dynamic pricing rate designs can remedy this problem and enhance economic efficiency. For that reason, they are receiving increased attention by state commissions throughout the country. California has made a major commitment to it, by approving the deploying of advanced metering infrastructure (AMI) and by establishing critical-peak pricing (CPP) rates as the default tariff for all non-residential customer classes with AMI. Other smart rate designs, such as real-time pricing, may be provided as options. To show the power of dynamic pricing, we develop a set of illustrative rates using data from a generic California utility and compute the benefits that would accrue to the state's economy from widespread deployment of these rates. While the numbers are specific to California, the process and methodology are perfectly general and should be of interest to utilities and regulatory bodies throughout North America. We develop dynamic pricing rates for four customer classes: Residential, Medium Commercial and Industrial (C&I), Large Commercial, and Large Industrial. In order to show the development of these rates, we begin with a discussion of existing rates. All the dynamic pricing rates are developed to be revenue neutral to these existing rates.