Last night at a local clean tech event called Switch Energy, there were many excellent speakers on climate change, sustainability, renewable energy, efficiency, and other topics including a great presentation by E Source on dynamic pricing. While all of these issues can dramatically impact energy use, dynamic pricing is an issue that may be less well known among many consumers of electricity, but has dramatic potential to bring great benefits to both utilities and their customers.
“Dynamic pricing for residential electricity use will bring significant advantages to utilities and their customers,” explains Ron Binz in a recent article on Energy Biz. “The customer response elicited by time-of-use rates will lower overall system cost, to the benefit of all consumers. Properly implemented, time-of-use rates are fairer and will induce customers to use electricity more efficiently. There is no serious debate about these statements.”
So how does dynamic pricing provide these benefits, and if it’s so great, why isn’t it more common? Essentially, dynamic pricing allows the cost of electricity to reflect how expensive the power actually is to produce, which varies depending on the time of day because of changes in demand across the grid system. For example, on a hot summer afternoon, electricity is more expensive to produce because everyone turns on their air conditioners and so the utility has to start operating more expensive peak power plants that would otherwise remain shut off in order to keep up with the demand.
If the cost of producing this expensive summer afternoon power were reflected in the price that customers actually paid to use the energy during that time, a lot of folks would turn down their air conditioners. The opposite would occur during times when energy is less expensive to produce, such as during the night, when customers could engage in more energy-intensive activities such as drying their clothes or charging an electric car with cheaper power.
However, in order to implement this kind of time-sensitive pricing, utilities have to deploy more advanced smart meters to track how much energy people are using during certain times. This is a major reason why dynamic pricing is not more common, along with utility concerns about customer resistance to a new and unfamiliar billing system. Yet according to the Energy Biz article, “the pressures to move to dynamic pricing are mounting and the foregone benefits are adding up.”
First of all, electric cars are becoming more popular, so more people would be interested in charging their cars during cheaper times of day. “Today’s time-insensitive residential prices will lead to higher system costs if customers plug in their vehicles after work, adding to the late-afternoon summertime peak load on generation and distribution systems,” explains Binz. “In the other direction, nighttime energy loads from EVs will be desirable by utilities with significant wind generation.” Secondly, more people are putting solar panels on their homes as the cost of installing such systems continues to fall. Utilities will need to know how valuable the energy really is that these distributed sources of renewable energy produce during different times of the day so they can credit the system owners correctly.
The most important part of setting up dynamic pricing for energy will be making sure that utility customers understand the benefits that it can provide to them, as “research suggests that most customers prefer time-of-use rates after they have experience with them.” Deploying an effective customer engagement system will be essential for getting customers to understand their own energy use and embrace the benefits that dynamic pricing brings, including lower costs, increased efficiency, and reduced peak demand.