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The Role of Dynamic Pricing in Fostering the Efficient Use of Electric Sector Resources

Presented toKansas Corporate Commission Workshop on Energy Efficiency

March 25, 2008Presented by:

Bernie Neenan

2© 2008 Electric Power Research Institute, Inc. All rights reserved.

Topical Outline

• Trends in residential electricity usage

• The impacts of dynamic pricing

• Feedback as a incentive to conserve

• Accessing price response


Trends in Household Electricity Consumption

The relative energy

intensity of many

household devices is

going down

Expected Change in Intensity of Household Electricty End-Uses

-34%-25%-17%-13%

-4%

-40%-35%-30%-25%-20%-15%-10%

-5%0%

Space Heat

Space Cool

Water Heat

Refrigera

tion

Lighting

But, we may be swimming against the

proliferation of devices with high

energy and power usage

Expected Change in Intensity of Household Electricty End-Uses

17%

27%

0%5%

10%15%20%25%30%

Other Uses TV/PC


Impact of Disruptive Technologies

• Increased market penetration of large-screen TV

One Digital Photo Frame/ Household Will Require Five 250 MW New Generation Plant

• Digital Photo Frames

A Video Game @ 360W is like another plasma TV in the house

• Higher saturation of video games that have exceptionally high power requirements

Plasma uses 2-½ the energy of CRT and 23% more energy than LCD

• Plug-In Hybrid Electric VehiclesA PHEV will need 2,500-3,000 kWh/yr. – the timing of charging will determine the system impacts


Roles for Pricing and Demand Response

• Efficiency. Setting price = marginal supply costs achieves the optimum allocation of societal resources

– Time-of-use – Real-time pricing– Market-participation pricing (ISO/RTO, direct or indirect)

• Rationing. Allocate available capacity resources efficiency– RTP– Critical peak pricing (CPP), Peak-time rebate (RTR)– ISO/RTO emergency programs

• Avoidance – load as a resources to reduce the overall system infrastructure needed to serve consumers’ needs

– Demand call options– Critical peak pricing (CPP), Peak-time rebate (RTR)– ISO/RTO installed capacity programs

• But, do prices convey the full cost to society of supplying electricity?


But, will Consumers be Responsive to Dynamic Pricing?

No• Electricity is too insignificant a

cost to be bothered with• Electricity is too essential, and

there are no substitutes• Electricity is not consumed

directly (indirect demand)• Conservation trumps price

response in terms of benefits• Insufficient inducement/incentive

to respond• It’s too hard to respond• Paying consumers to curtail is

more effective

Yes• Electricity expenditures are equal

to those of telephone service, more than cable and internet

• Indirect demand is true of communication services

• Price repose may result in a different level of service

• Reflects utiltiy and regulatory preferences, not necessarily those of customers

• Pilots in CA, IL, Canada and IOS/RTO program report response with no enabling technology

• Prices do a better job of rationing


Defining Price Elasticity

=dQ

QR

Behavioral Response

×

Customer’s Ability to change

Price Elasticity dP

PR

Incentive to Change

Price Elasticity - % change in usage induced by a 1% change in price0 </= Price Elasticity </= over 5.0 (absolute value)Elasticity =1 yields changes in proportion to load

Own-Price Elasticityadjustment of overall expenditures in response to change in the price of electricity (goods/output swapping).

Negative values

Shifting Elasticityadjustment of overall expenditures in response to change in the price of electricity (temporal/input swapping).

Positive or negative values


Example of Own-Price Elasticity of Demand (reallocation of expenditures)

100

125

150

175

200

225

250

275

300

325

350

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Hour-Ending

kWh

Original Load Own-Price Adj. Load

Own-price effect

The price increases causes the consumer to shift expenditures away from electricity to other goods and services


Example of Substitution Elasticity (temporal rearrangement of energy consumption)

100

125

150

175

200

225

250

275

300

325

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Hour-Ending

kWh

Own-Price Adj. Load Substitution Adj. Load

Peak Period

Shifting

The price spread causes the consumer to shift electricity usage from the peak to the off-peak periods of the day, with virtually no change in total energy consumption (but peak demand is decreased)


What is the Conservation Effect of Dynamic Pricing?

• Some TOU and RTP analyses from 1990’s found that total energy consumption went up for some consumers

– Cheaper off-peak prices induced increased consumption– If the demand charge (for C&I) was effectively eliminated,

the load increase effect was even greater in some customers

• Recent TOU, CPP, a PPB pilots found that dynamic pricing induced a “conservation effect”

– Shifting observed on extreme price days (CPP, PTR– Overall monthly energy use went down, despite no real

change in electricity price outside the high-priced days– Some associate this with an own-price elasticity effect

• TOU- time-0f-use

• RRTP = real-time pricing

• CCP= critical peak pricing

• PTR- peak time rebate


Report Highlights – Own Price Elasticity (OPE)

Own-Price Elasticty Estimates - Mostly pre-1990 Studies (absolute values)

0

0.2

0.4

0.6

0.8

1

1.2

1.4

Res Com Ind

SR MeanLR Mean

• Very high price elasticities were found -.05 - -.120

• Most estimates of OPE are from pre-1990 studies

• Very little price variation results in a high level of specification error

Impact of a reoccuring 2.5 % price increase in electricty demand in SR and LR

010002000300040005000600070008000

1 2 3 4 5 6

SR Elast = .2LR Elast - .9

• Impact of a 2.5% re-occurring price increase on res. usage

• Are these results credible?

• CA dynamic pricing study using values of .02 - .04 (absolute values)


Report Highlights – Shifting Price Elasticity

Distribution of Estimates of the Elasticity of Electricity Demand under Time-Varying Pricing - 18 Studies

0

2

4

6

8

10

12

14

0 to .05

.06 to .10

.11 to .15

.16 to .20

.21 to .25

.26 to .30

.31 to .35

.36 to .40

Elasticty Range (absolute value)

Freq

uenc

y

• 72% of reported values for shifting elasticity are .15 or below

• Many studies report 20-25 % of participants contribute 75% or more of the measured response


Composite of Price Elasticity Estimates

Electricity Price Elasticity Estimates - Range and Mass Central Points ( Absolute Values) for 15 Studies

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18Study Number (Table 4)

Estim

ated

Ela

stic

ity -

Abs

olut

e Va

lue

Points are mass center, lines the values range (where appropriate)

TOU RTPCPPHousehold HH HHBusiness BusinessB

Own-price elasticity(all others substitution)


Evidence that Feedback Influences Energy Use

Feedback Studies - % Elnergy Savings

0

5

10

15

20

25

30

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35

Study #

% S

avin

gs

....

Average All 11.60

70’s 80’s 90’s 2000+


Participation in Feedback Pilots

Feedback Studies - # Participants

0

500

1000

1500

2000

2500

3000

3500

4000

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35

Study #

Stud

y Pa

rtic

ipan

ts

....

50,000


Feedback Savings: Direct and Indirect

Feedback Studies - % Electricity Savings; Direct and Indirect Feedback

0

5

10

15

20

25

30

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35

Study #

% S

avin

gs

....

Average All 11.60

Direct 11.48Indirect 8.40


Reported Direct Feedback Savings – Electronic Display

Feedback Studies - % Electricity Savings - Electronic Display

02468

101214161820

2 6 9 10 17 18 19 2 0 2 1 2 3 2 4 2 5

Study #

% S

avin

gs

....

Pay-as-you-go Meters

Eliminated – bill stuffers, videos, self-read diaries, flashing lights, community cooperation, expert counseling; also gas or combined gas and electric


Feedback Participation – Electronic Display

Feedback Studies - # Participants - Electronic Display

0

500

1000

1500

2000

2500

3000

3500

4000

2 6 9 10 17 18 19 20 21 23 24 25

Study #

Stud

y P

artic

ipan

ts

....

50,000


Net Present Value of Feedback Investment

Capital cost = $200. OC - $24/yr

Capital cost = $100. OC

– paid by consumer

Present Value of Savings from Investment in Feedback for all Residential Customers

($600)

($400)

($200)

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

00.025 0.05 0.1 0.15 0.2 0.25 0.3

% Savings

Life

time

AC

from

Fee

dbac

k ($

mill

ion)

CC$200/OC$20CC$100/OC $20

A

D

BC


Summary and Outlook

• Price response intensity is relative low and unevenly distributed among households

• This is to be expected: the industry has strived for over 75 years to abate price volatility and mask the time-differentiated cost of supply

• It will take time (and patience) to elevate electricity expenditures to a more prominent place in household decision making

• This is not justification to abandon adopting efficient pricing• Nor is it a rationalization to impose dynamic pricing universally

or punitively• It is a call to action for the entire industry


A Corrective Prescription - Market Transformation

Create opportunities to introduce time-varying pricing and feedback in a variety of situations

Centralize the design and evaluation of these offerings to extract the information and learnings

Share the experiences widely and purposefully

Engage in the development of enabling technologiesAuto DR for commercial facilities

Household Hand- Frees device controls

Smart and efficient devices

Integrate price and demand response into RTO/ISO operations

Merge energy efficiency and demand and price response initiatives into cohesive portfolio of

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