1 December 2001 1 CHRISTENSENASSOCIATES Real-Time Pricing and Related Successful Products Michael T....

1December 2001 1 CHRISTENSEN ASSOCIATES

Real-Time Pricing and Related Successful Products

Michael T. O’SheasyVice PresidentChristensen Associates


What is Real-Time Pricing?

An electricity rate structure in which retail energy prices:

• vary frequently (e.g., hourly),

• with short notice (e.g., hour-ahead or day-ahead),

• to reflect expected hourly costs


Topics

Tenets of Real Time Pricing (RTP) RTP at Georgia Power Company Why does an RTP Product make sense (and

cents)? Features of a Two-Part RTP and resultant prices Price Response and Market Effects PPP and Portfolio Pricing Related Demand Response Products


Efficient RTP Pricing

1. To ration supply on anything other than price invites disaster. Price may not be the only solution but it is efficient because it recognizes that value is specific to consumers and dynamic.



2. Large social benefits can be achieved by offering dynamic pricing to larger customers (i.e. your grandmother need not be on RTP).



3. Efficient RTP pricing will inherently reorder competing players into cooperative teammates producing win-win solutions. One participant voluntarily forgoes consumption of a kWh while another participant eagerly consumes a kWh. The whole key here is that kWh value is not only user specific but dynamic in essence.


Electric Utility AtmosphereGeorgia Power Company Early ‘90’s

Competitive Electric Suppliers

Sufficient Base Load Capacity

Peaking Requirements in 1996

Short Run Marginal Cost < Average Embedded

Competitive Region


RTP Pilot Highlights

Customers say they want:– Greater control over their bill– Simpler, more straightforward rates– No demand ratchet or demand charge– True real time pricing


Prices based on hourly marginal cost will:– Send correct price signals that vary with time– Communicate true production and transmission

cost of electricity– Lower prices to customers in most hours– Lower GPC’s costs by increasing plant

utilization– Improve customer value and satisfaction



Tariff will contain 2 parts:– Access Charge

• Bridges gap between marginal revenue and embedded revenue requirements

• Insures revenue neutrality; protects non-participants (and GPC)

– Marginal prices vary by hour (from 2 cents to 25 cents per kWh in the first year)




Tariff is revenue neutral if customer makes no response

Test pilot provides experience while limiting risk– Up to 25 test customers and 25 control group

customers– 2 year duration– Measure customer response to varying prices



Summary– Responds to rate needs expressed by customers– GPC will research new innovation; EPRI will

participate– Large potential to benefit customers, State, and

GPC


RTP Pilot Objectives

Reduction in System and Customer Cost Increase Earnings Margins Increase System Reliability Improve Customer Satisfaction Feedback on Price Sensitivity


Real Time Pricing Pilot Program Details

Hourly dynamic prices follow the changing cost of power

Service is firm

Price is per kWh for each hour. No demand charge

Each day’s prices sent the previous day via electronic mail

Access charge for (or credit) assures revenue neutrality


RTP in the State of Georgia Year 2001

Largest Program in the World > 1600 Customers

– > 5,000 MW– > $1 billion revenue

IRP Resource Increasing Marginal Cost Day-Ahead and Hour-Ahead


Real-Time Pricing for GPC

Two-part tariff design Day-ahead RTP

– 250 kW minimum Hour-ahead RTP

– 5 MW minimum IRP Other rate design


GPC Philosophy on RTP

1. RTP is our marginal cost of producing electricity

• Lambda

• Losses

• Marginal Cost of Transmission

• Outage/ct Cost

• Risk Adder


2. GPC prefers low prices• Customers Satisfaction

• Economic Development

• Customer Choice

• Constant Profit Contribution per kWh

• Credits below CBL

GPC Philosophy on RTP


Product Characteristics Create Risk

Cost Risk Load Shape Risk

Expected

Ave ¢/KWH

Hours

Target Customers Load Shape

KW

Off Peak

Off Peak

On Peak

Target Customers Actual Load Shape

Target Customers Forecasted Load Shape

On peak and off peak prices* based upon forecasted load shape

On peak and off peak prices* based upon actual load shape

Hours

¢/KWH

TOU Prices

Scenarios

*Assume Actual Hourly Prices equal Forecasted Hourly Prices


Electricity Product Characteristics

Storage/Inventory Cost Volatility Historical Purchasing “rights” Transportation Constraints


Customer Risk Propensity Drives Portfolio Pricing

Flat and Blocked Energy Customer Energy Demand (CED) Hours Use of Demand (HUD) Time of Use (TOU) Interruptible Service (IS) Real Time Pricing (RTP)


Risk on Seller

100%, 100%

100%

100%0

•HUD

•CED

•TOU

•1 Part RTP

•2 Part RTP

•Curtailable EnergyLoad

Shape Risk on Seller

Cost Risk on Seller

•Flat Bill

•Flat Energy


Features of “Two-Part” RTP

Customer pays for a baseline level of usage (e.g., recent historical usage) at standard tariff prices

Differences in usage from the baseline (increases or decreases) are billed at RTP prices


Features of “Two-Part” RTP

Customer revenue neutral at baseline usage

Demand response benefits the RTP customer, the utility, and all other customers


Two-Part RTP Bill

Customer’s bills change from their “Standard” Bill only when they change their hourly loads from the “Baseline” load shape

RTPBill

=StandardBill

LoadHour

+ M.C.Hour

x


Implicit Contract Under Two-Part RTPPart One – Baseline load

• Payment for baseline load:Billed at standard tariff

CONTRACT

Current Tariff

@

1 24

Baseline Charge

kWh


Implicit Contract Under Two-Part RTP Part Two – Incremental load

• Incremental energy charge:Differences between baseline and actual usage are billed at RTP prices that reflect wholesale costs

CONTRACT

MarketPrice

@ IncrementalEnergy Charge

1 24

kWh


Example of Incremental Energy Charges (Relative to Baseline)

MWh

1 24

Actual load

Customer “sells” load at high RTP prices

Customer “buys” load at low RTP prices

CBL

Hour of Day


Summary of Two-Part RTP Structure

Customer buys their CBL at standard tariff prices according to mutually agreed upon contract

Customer buys or sells electricity (relative to the CBL) to suit their needs in each hour at prices based on a forecast of the wholesale market prices


How are RTP Prices Calculated?

Fuel plus variable O&M of incremental generator or a purchase (system lambda)

– Stable in most hours– Higher on high-load days

Losses between generator and customer meter

– Varies by hour– Greater in high-load and/or hot weather



Four (4) mills per kWh contribution to fixed costs

– Helps recover fixed costs– Compensates for risks– Protects non-participants



Incremental transmission cost– Occurs on summer weekday afternoons– Expect 200 to 300 hours per year– About 2-10 cents per kwh– Reflects transmission capital costs– Assigns costs to appropriate hours– Assigns costs to those causing it

Reliability (or scarcity) value– “Loss of load probability”– Realized in “capacity constrained” hours– Expect about 50 hours per year


Economy

Weather

Fuel Price

Unit Availability

Tie Lines

Wholesale Market

RTP RTP PricesPrices

Factors with Major Influence on RTP Prices


GPC’s RTP-DA Prices

*Hour at end of interval

HR* cent/kWh status

17 89.4200 A

18 49.5094 A

19 29.2998 A

20 8.2002 A

21 7.6772 A

22 5.2903 A

23 3.6407 A

24 3.2380 A

HR* cent/kWh status

01 3.1440 A

02 3.1151 A

03 2.9661 A

04 2.9329 A

05 2.9307 A

06 2.9384 A

07 2.9980 A

08 3.0449 A

HR* cent/kWh status

09 3.0531 A

10 3.6141 A

11 4.7617 A

12 5.2418 A

13 7.8890 A

14 39.1817 A

15 79.3005 A

16 109.7100 A


Events of Last July

Load Spot HA Price

Day Hour (MW) ($/MW) (¢ents)

7/30 1200 36,168 240 24.62

1300 37,600 430 48.56

1400 37,863 800 86.42

1500 37,592 106 18.20

1600 37,500 6300 642.66

1700 37,000 5200 527.68

1800 36,100 138 18.87


Do Customers Respond to RTP?Summary of Findings

Portion of customers found to respond significantly to RTP prices: 60-75%

Range of flexibility parameters: .01 - .40 (Approximately equal to negative of own-price elasticity)

A short-period price spike of 10 to 20 times the typical price can yield load reductions of 10 to 20% (e.g., 150 MW from 1,000 MW of load)


Typical Load Response

Increased Usage in All Hours

0:00 4:00 8:00 12:00 16:00 20:00 24:005

6

7

8

9

10

5

6

7

8

9

10

No Response in Low-Price Hours and Decreased Usage in High-Price Hours

(Peak Shavings)

0:00 4:00 8:00 12:00 16:00 20:00 24:00

Increased Usage In Low-Priced Hours and No Response in High-Price Hours(Hiding behind the Baseline Load)

0:00 4:00 8:00 12:00 16:00 20:00 24:00

5

6

7

8

9

10

Increased Usage in Low-Price HoursDecreased Usage in High-Price Hours

0:00 4:00 8:00 12:00 16:00 20:00 24:0056

7

8

9

10


Demand Profile

Tuesday

0

5000

10000

15000

20000

25000

30000

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

KW

DE

MA

ND

0

2

4

6

8

10

12

CE

NT

S/K

WH

Cents/kWh Actual kW CBL kW


Distribution of RTP Price Elasticities SIC 20 Food Products

0.000

0.050

0.100

0.150

0.200

0.250

0.300

0.350

0.400

0.450

0.500

1 3 5 7 9 11

13

15

17

19

21

23

25

27

29

31

33

35

37

39

41

43

45

47

49

51

53

55

57


Distribution of RTP Price Elasticities Commercial Office Buildings

0.000

0.050

0.100

0.150

0.200

0.250

0.300

0.350

0.400

0.450

0.500

1 3 5 7 9 11

13

15

17

19

21

23

25

27

29

31

33

35

37

39

41

43

45

47

49

51


Distribution of RTP Price Elasticities Schools and Universities

0.000

0.050

0.100

0.150

0.200

0.250

0.300

0.350

0.400

0.450

0.500

1 4 7 10

13

16

19

22

25

28

31

34

37

40

43

46

49

52

55

58

61

64

67

70

73

76

79


Distribution of RTP Price Elasticities Supermarkets

0.000

0.050

0.100

0.150

0.200

0.250

0.300

0.350

0.400

0.450

0.500

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59


0.60

0.70

0.80

0.90

1.00

1.10

1.20

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

Nor

mal

ized

Loa

d

0

2

4

6

8

10

12

14

16

Loga

rithm

of

Pric

e ($

/MW

)

Load at highest prices

Highest prices

Reference Load

Load at moderate prices

Reference prices

Moderate prices

RTP-DA Prices and Load Response, by Price Day-type


Price/Load Response

5

57

414

323

4242

132

92

Days

0

50

100

150

200

250

300

350

400

450

Loa

d R

esp

onse

(M

W)

RTP Price Load Response

RTP-DARTP-DA


0.00

0.20

0.40

0.60

0.80

1.00

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

No

rma

lize

d L

oa

d

0

4

8

12

16

20

Log

arith

m o

f P

(in

$/M

Wh)

Load at highest prices

Highest prices

Reference Load

Load at moderate prices

Reference prices

Moderate prices

RTP-HA Prices and Load Response, by Price Day-type


Price/Load Response

RTP-HARTP-HA

189168

190

319

450

232

Days

0

100

200

300

400

500

Loa

d R

esp

onse

(M

W)

RTP Price Load Response


Georgia Power’s RTP Load Response Modeldeveloped by Christensen Associates

January, 2001Prices ($/MWh):

Hour Index Hour Day-Ahead Hour-Ahead

1 12 am - 1 am 23 149 2 1 am - 2 am 22 57 3 2 am - 3 am 22 40 4 3 am - 4 am 22 24 5 4 am - 5 am 22 22 6 5 am - 6 am 22 22 7 6 am - 7 am 22 22 8 7 am - 8 am 23 22 9 8 am - 9 am 24 22 10 9 am - 10 am 38 28 11 10 am - 11 am 413 40 12 11 am - 12 pm 661 66 13 12 pm - 1 pm 1,000 102 14 1 pm - 2 pm 1,326 262 15 2 pm - 3 pm 1,445 280 16 3 pm - 4 pm 1,705 265 17 4 pm - 5 pm 1,791 259 18 5 pm - 6 pm 1,937 268 19 6 pm - 7 pm 1,784 255 20 7 pm - 8 pm 1,443 238 21 8 pm - 9 pm 1,181 217 22 9 pm - 10 pm 662 208 23 10 pm - 11 pm 465 199 24 11 pm - 12 am 344 202

Enter Time Period: July 16 - Aug 15

Enter Day Type: Monday

Maximum Temp (deg F): 95

Minimum Temp (deg F): 78


Predicted Load Change

Predicted Load Change Predicted Load Level Weather-Adjusted Reference Load Level

Hour Total RTP Hour Ahead Non-SE Ind Non-SE Com SE Ind SE Com On Site Ind On Site Com Total RTP Hour Ahead Non-SE Ind Non-SE Com SE Ind SE Com12 am - 1 am (124) (123) 1 1 0 (0) (3) 0 2,858 526 1,105 353 518 83 1 am - 2 am (49) (49) 1 1 0 (0) (2) 0 2,958 617 1,113 349 522 85 2 am - 3 am (29) (28) 1 1 0 (0) (2) 0 2,975 634 1,114 351 523 85 3 am - 4 am (9) (8) 1 1 0 (0) (2) 0 3,003 656 1,114 356 521 87 4 am - 5 am (6) (6) 1 1 0 (0) (2) 0 3,044 655 1,127 372 523 91 5 am - 6 am (5) (5) 1 1 0 (0) (2) 0 3,146 660 1,173 400 532 97 6 am - 7 am 57 22 7 10 8 2 6 1 3,307 676 1,241 437 552 104 7 am - 8 am 59 22 7 11 8 2 7 1 3,478 686 1,332 468 576 111 8 am - 9 am 61 23 8 12 9 2 6 1 3,600 688 1,382 505 588 118

9 am - 10 am 45 15 9 15 6 2 (2) 0 3,637 672 1,404 533 588 123 10 am - 11 am (197) 1 (57) 1 (82) (10) (40) (12) 3,453 675 1,356 535 505 114 11 am - 12 pm (300) (29) (82) (6) (110) (13) (45) (16) 3,367 647 1,335 535 479 111 12 pm - 1 pm (453) (83) (111) (25) (142) (18) (55) (19) 3,198 602 1,291 511 449 105 1 pm - 2 pm (575) (157) (129) (30) (160) (20) (58) (22) 3,095 529 1,286 508 434 102 2 pm - 3 pm (597) (164) (134) (32) (164) (21) (60) (22) 3,038 494 1,274 506 425 101 3 pm - 4 pm (619) (158) (144) (35) (175) (22) (61) (24) 2,991 506 1,246 496 411 99 4 pm - 5 pm (608) (147) (144) (35) (176) (22) (60) (23) 2,921 490 1,223 480 405 97 5 pm - 6 pm (613) (145) (146) (35) (182) (22) (60) (23) 2,833 481 1,184 460 398 93 6 pm - 7 pm (572) (134) (138) (31) (171) (20) (58) (19) 2,753 468 1,165 428 392 86 7 pm - 8 pm (525) (129) (123) (26) (157) (17) (56) (17) 2,755 474 1,168 413 405 81 8 pm - 9 pm (483) (123) (110) (22) (144) (15) (54) (15) 2,783 491 1,177 403 419 80

9 pm - 10 pm (387) (122) (77) (13) (107) (11) (47) (10) 2,866 498 1,212 397 455 81 10 pm - 11 pm (359) (130) (63) (9) (92) (9) (47) (9) 2,876 502 1,220 375 469 79 11 pm - 12 am (327) (133) (51) (6) (78) (8) (44) (7) 2,876 501 1,221 359 486 76


Implications for Demand-Side Strategies

market prices sensitive to demand at high demand levels (elasticity 12)

$70, Retail

Retail Demand

MWs

$400

$200

Supply

Demand response – e.g., RTP – an essential market feature


What Customers Like About RTP

Access to competitive market prices Low expected energy cost Certainty of cost of consumption changes


What Do Customers Think?

This chemical company’s threshold is around the 6¢/kWh range. At times they will “buy through” some higher priced hours when they have to meet a customer’s order. They love the rate.

This mining company responded heavily to pricing in July. When the price were over 20¢/kWh, they would curtail below their SE threshold by a couple of mW.



This paper manufacturer’s threshold is above 9¢/kWh for short periods. Their profit margins are low so they are fairly aggressive about saving money.

This mining company cranks up self generation when the price trend shows that the RTP price will be above 8-10 cents.



This wood product company break point is around 3.0 cents per kWh. At 3.0 cents or lower, they maximize RTP purchases. At 8.0 cents per kWh, they maximize self generation.

This aggressive commercial facilities manager cuts back florescent fixtures by 1/3, adjusts thermostat, reduces chillers in the afternoon, turns down water heating, and allows the temperature to float on chilled water loop.


Why Offer RTP?

Lowest priced product based upon sound risk principles

Provides a connection between wholesale and retail energy markets

– Retail prices reflect wholesale costs– Demand response to high prices provides

needed capacity relief and reduces wholesale prices

– Mitigates market power


Two-part feature provides:

– Customer bill stability at baseline usage levels– Conservation incentive on decrements

Why Offer RTP?


What Support Activities are Required for a Successful RTP Program

Reliable and accurate communication of prices

Strong customer support network; education on RTP

Limits on price risk


Wholesale Markets Employ Vehicles to Mitigate Risks

Few can tolerate the level of price risk; forwards and options essential to electric markets

PRIC

ES

DAYS

$140

$ 30

$ 18

SPOT

FORWARD

Price Protection Products



Allows RTP customer to manage RTP price risk and volatility

Financial hedge contracts that lock in a price for a specific time period

3 Types of CfDs (Contract for Differences):–Standard CfD–Range CfD–Limited CfD


Caps, Collars, Indexes Customer still benefits by reducing load in

response to high RTP prices in specific hours



Standard CfD

A CfD is a fixed price on GPC’s average offered RTP price over a specific time period. CfD is an acronym for Contract for Differences. No upfront premium is required. You select the Time Period and the amount of load to contract.

CfD

GPC pays Customer

Cen

ts/k

Wh

High Avg.

Low Avg.Customer pays GPC


Time Period July, All Hours

Contracted kW 1,000

# Hours 744

Contracted kWh 744,000

CfD Price 6.0 Cents/kWh

CfD Example:


Settlement for High Average Price: = (10.0-6.0) * 744,000 = $29,760. GPC pays Customer $29,760.

-OR-

Settlement for Low Average Price: = (4.0-6.0) * 744,000 = ($14,880). Customer pays GPC $14,880.

CfD Example:


“Range” CfD

GPC bills customers

Low Avg. Price

Max Payout Price

Very High Avg. PriceGPC pays customer

¢/kWh

“Range” CfD Price

Payout Range“Standard” CfD Price

Range CfDs are different from Standard CfDs in two ways. 1) Range CfDs have lower prices. 2) Range CfDs have a maximum payout price. The customer benefits from a lower price. And, payouts to the customer may only be made within the payout range as opposed to the Standard CfDs which have no upper boundary on the payout.

Range CfD Example


“Limited” CfD

Hourly RTP Prices

050

100150200250300350400450500

1 744Hour

Cen

ts/k

Wh

Protection is limited to hours in which the RTP price is less than a “RTP price limit”, e.g., $1/kWh.

Protection Limit


“Limited” CfD

Hourly RTP Prices < $1/kWh

050

100150200250300350400450500

1 744Hour

Cen

ts/k

Wh

Prices $1/kWh (100 cents/kWh) and greater are excluded from the settlement calculation.

TypeCfD

Price

Resultant Average

RTP Price SettlementStandard 6.00 6.60 (0.60)Ltd (< 1$) 5.00 5.70 (0.70)

Since the price protection does not include RTP prices of $1 or greater, the CfD price is lower. Here is a potential settlement comparison for a Standard CfD and a Limited CfD. () indicate a payment to the customer.


Summary of Products (Prices below are examples intended to be used only for illustration)

Type of Product CfD Price Difference from

“Standard”

“Standard” CfD = 6.0 ¢/kWh -

“Range” CfD = 5.5 ¢/kWh

Payouts only within range of average prices between 5.5 and 9.0 ¢/kWh.

“Limited” CfD = 5.0 ¢/kWh

Protection is limited to hours in which the price is < RTP Price Limit.


How Do They Work?

CapA Price Cap is a ceiling price on GPC’s average RTP price over a specific time period. You pay an upfront premium for the product. You select the Cap Price, the Time Period, and the amount of load to contract.

Cap

GPC pays Customer

Cen

ts/k

Wh

High Avg.

No Settlement Necessary for Low Average Price


How Do They work?

CollarA Collar is a Cap and a Floor price on GPC’s average RTP price over a specific time period. No upfront premium is required. Each Cap Price has a Floor Price associated with it. You select the Cap Price, the Time Period and the amount of load to contract.

Cap

GPC pays Customer

Cen

ts/k

Wh

High Avg.

Low Avg.Customer pays GPC

FloorNo Settlement Necessary


Real Time Pricing Summary Benefits Coupled with PPP

Participants– Provides industrial and commercial customers the

cost-based pricing they want and gives them more control over their bill and lower unit costs

Non-participants– Protects them from revenue erosion and benefits

them by allowing Utility to operate more efficiently at a lower cost to all ratepayers


Utility Company– Provides more efficient pricing and a more

competitive position State

– Attracts new business and rewards business expansion, resulting in increased employment and tax revenues.

Real Time Pricing Summary Benefits Coupled with PPP


Portfolio Pricing on Risk Principles:Expected Customer Cost vs. Price Risk Profile

Risk to Buyer

ExpectedCost

toBuyer

FIP

RTP-DA

VIP RTP w/ Adjustable CBL

RTP w/ PPP

RTP-HA

PLL

1 December 2001 1 CHRISTENSENASSOCIATES Real-Time Pricing and Related Successful Products Michael T....

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Transcript of 1 December 2001 1 CHRISTENSENASSOCIATES Real-Time Pricing and Related Successful Products Michael T....