Dynamic pricing reflects utilities' actual costs more accurately than traditional rates. With dynamic pricing, electric rates can aim to recover costs and meet defined goals.
Q : As an electric utility, should I be preparing for dynamic pricing?
A: Generation costs are rising. Advanced metering infrastructure provides utilities with useful time-centric data for developing dynamic pricing in place of bundled rates. Dynamic pricing reflects utilities' actual costs more accurately than traditional rates. With dynamic pricing, electric rates can aim to recover costs and meet these goals:
- Promote energy efficiency
- Incentivize peak-load reduction and off-peak energy use
- Promote equity between customers
- Clearly communicate prices and costs
- Facilitate customer choice
All types of dynamic pricing include a time-of-use component. Time periods can be as simple as seasonal or daily peak period to more robust hourly measures. Pricing based on hourly variations in wholesale market prices can allow utilities to send real-time price signals to retail consumers, creating opportunities to reduce costs and increase value to consumers. Pilot studies of dynamic pricing at the retail level have shown demand reduced up to 20 percent during peaks, and customers usually reduce energy consumption while lowering their total bills.
Burns & McDonnell performed comprehensive electric rate studies in Naperville, Ill., and Lakeland, Fla., as part of the utilities' federally funded Smart Grid projects. Our analysts developed detailed financial-forecast models representing each utility's overall cost of providing service. The costs were separated by customer class and unit costs calculated during multiple time periods to develop time-of-use rates. Hourly energy-load data was integrated into the models to estimate revenues under new rates.
Technologies such as electric vehicles, battery storage and thermal energy storage increase the need for dynamic pricing — and the developing Smart Grid makes these rate structures both possible and valuable for utilities and their customers.
Ted Kelly is a senior manager in the Burns & McDonnell Business & Technology Services Group. His extensive experience includes utility rates and financial feasibility evaluation. Contact him at 816-822-3208.