Thursday, June 9, 2011

Who Gets Hurt in Peak Power Pricing?

SAN FRANCISCO --- Utility bills will likely rise over the summer months under dynamic pricing programs for electricity, but the overall impact on most people over the course of a year will be fairly contained.
"Ninety-eight percent of customers would ...

SAN FRANCISCO --- Utility bills will likely rise over the summer months under dynamic pricing programs for electricity, but the overall impact on most people over the course of a year will be fairly contained.

"Ninety-eight percent of customers would see a gain or loss [in the size of their annual utility bills] of less than 20 percent," said Severin Borenstein, the Co-Director of the Haas School of Business at UC Berkeley, during a forum at the California Public Utility Commission. Borenstein recently conducted an analysis on the impact of different pricing programs.

In the study, Borenstein essentially created three hypothetical utility programs. In the first, consumers paid a flat rate of 16 cents per kilowatt-hour. In the second, consumers participated in a time-of-use pricing program where prices varied from 12 cents in the dead of winter to 39 cents in peak power periods. In the third, consumers were under a critical peak period program in which prices varied from 11 cents a kilowatt hour to $1.00 at critical peak power. (The critical peak power tariffs offer lower off-peak rates, but charge higher rates at critical hours.)

He then took four years' worth of actual data about utility bills from California consumers and ran the numbers. Here's what he found:

--There is a larger set of winners under the critical peak power program than the time-of-use rate program. However, there is also a larger set of people -- 7 percent of the total -- that will see their utility bills rise more than 20 percent.

--Under a basic program, lower-income consumers face slightly higher bills under dynamic pricing programs and rich people see their bills decline slightly. The aberration, however, is the result of geography. In short, wealthier people live on the coast in California and don't need as much air conditioning in the summer as their lower income counterparts in the sweltering Central Valley.

If you account for regional differences and compare what happens to lower- and upper-income customers within a distinct geographic belt, the bills of lower income customers actually go down slightly, while the upper-income households see a slight rise in bills. Thus, adjusting tariffs to account for the prevailing weather conditions would eliminate the inequality.

"Critical peak period [pricing] would be pretty close to neutral, but it would probably help poor people slightly," he said. (The Galvin Electricity Institute has found even higher gains in some studies.)

--Although bills would largely stay about the same for most consumers, bills in the summer would be higher than those in winter. However, this is the sort of thing consumers can probably anticipate. "Summer happens," he said. "It comes pretty predictably."

--To help offset any major problems, utilities could create "snap credit" programs. If a bill suddenly escalated, utilities could, hypothetically, allow customers to pay 50 percent of the total over the next few months. Credit, in other words, would be offered in a snap. Snap credit is better than existing programs that let consumers smooth out payments over an entire year because they can have the effect of reminding customers about how power consumption rises in the summer and about the need to conserve.

--Another program to help consumers understand dynamic pricing could be the practice known as shadow billing. In shadow billing, consumers under a flat rate program could be given an additional, hypothetical bill that would detail how much they would have spent (and saved) under a dynamic pricing program. Conversely, dynamic pricing customers could get a shadow bill of what a flat rate would do for them. Dynamic pricing doesn't work for every customer, so a program like this would help acclimate everyone.

--What would happen to flat rates if too many people joined dynamic pricing programs? Not much. If one-sixth of California utility customers went to a dynamic program, it could raise rates for flat payers by 1.92 percent.

--The big winners in dynamic pricing become the utilities. Once dynamic pricing gets accepted, there is evidence that these programs can help reduce peak power and hence the need for extra peak power infrastructure that helps a utility lumber through a hot summer's day. A few years ago, Georgia Power said that its peak pricing program has helped it reduce peak power by 16 percent, according to Borenstein.

--These programs may not make immediate economic sense if a region or utility has excess capacity. Singapore, for instance, hits 6 gigawatts at its peak but has a 10-gigawatt capacity. California has some excess capacity at the moment. Nonetheless, every region invariably hits a point where power production approaches demand, so it's good to get practice.

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