Time-based Rates in VT

March 15, 2006 Jürgen Weiss – Time-based Rates in VT

Time-based Rates in VT

Jürgen Weiss

LECG, LLC

[email protected]

Workshop on Smart Meters and Time-based Rates

Montpelier, Vermont

March 15, 2006


Presentation Overview

– The Conclusion Upfront– Benefits of Time-based Rates– RTP versus other time-based rates– Experience with time-based rates– The role of “smart” metering– Some implementation issues– Proposed next steps for Vermont


RTP and smart metering will come, so let us figure out not “if” but “how”!

• Practically universal agreement among academics that inelastic demand is a serious structural problem of electricity markets leading to substantial additional costs to society

• The technology and market information now exist to address the problem

• The benefits of doing so today very likely exceed the cost of doing so.

• There are serious incentive issues that need to be and should be addressed

• The focus should be on how to do this!


Time-based Rates have important benefits for consumers, utilities and society

• They reflect the opportunity cost of resources

• Properly designed, they will lead to– Better functioning wholesale markets (market power, efficiency)

– Lower short term costs (fuel, line losses, congestion charges)

– Lower long term costs (peaker capacity, T&D upgrades)

– Higher System Reliability (load reduction during emergencies)

– Better Risk Management (lower price volatility, co-location of risk and decision making)

– Better Customer Service (Information, Choice, Control, Diagnostics)

– Maybe lower emissions (not so clear)

• Long-term benefits likely much greater than short term benefits


Among ToU rates, RTP is the right theoretical solution…

• Very old and established economic literature on peak load pricing and more recently real time pricing

• Current system leads to inefficient consumption and hence too much supply

• Absence of RTP obscures alternatives to generation or transmission investment

• Absence of RTP means that there is a cross-subsidy: those customers who could change consumption patterns subsidize those who cannot; off-peak customers subsidize on-peak customers


… and feasible for all customer classes

• Industry “consensus”: – RTP maybe for large C+I, ToU rates for everyone else (also

recommended by recent DoE report to Congress)

• Current argument against RTP for all customer classes:– Metering and related infrastructure too expensive for residential

and maybe small C+I customers

• However,– Metering and related costs are decreasing rapidly– RTP is the right answer, ToU rates require similar infrastructure

and are certain to have lower benefits– In some ways, RTP is easier to understand (you can look up the

market price online – it exists, unlike some ToU price)


Utilities should like RTP and time-sensitive rates

ToU/RTP provides a better allocation of risk– Reduces utility exposure to high and super-high prices

– Results in lower power purchasing costs

– Results in lower risk and should therefore lower CoC

– If current rates include a risk premium for price volatility, RTP revenues may be lower but the decrease in revenue should be offset by lower CoC

• Open question: Relationship of VT rates to NEPOOL real-time prices


…but it is important to create the right incentives for consumers AND utilities

• Legitimate Fear: Will RTP lead to utilities not meeting their revenue requirement and hence not cover fixed costs?

• The Answer: It depends– Whether or not RTP leads to net conservation– Relationship between current rates, RTPs and CoC

• IF conservation is a desired by-product– Re-examine current utility rate structure to make sure there is decoupling

of revenues from fixed cost recovery so that utilities can recover fixed costs

• Related: Is there still a utility preference for assets? – The famous A-J Effect– If so, what are possible solutions?

• Include metering and related equipment in asset base?


Potential longer term benefits should also be considered.

• Paradigm shift for consumers, creating awareness of electricity consumption more generally (including the time pattern)– Important first step towards any real conservation effort

• Creates incentives for technological innovation– Hardware/software to shift load and/or reduce load during high

price periods

• Likely to result in significant additional short-run elasticity in the long run

• Energy Smart Pricing Plan experience has revealed that some of these benefits may materialize from the start


RTP does NOT mean hugely fluctuating customers bills

• Risk to consumers often cited in opposition to residential RTP

• But it is possible to separate Real-time-pricing from how a customer’s bill is calculated– Can have bill reflect the average real-time price over the past X months

– Results in relatively smooth monthly bill (probably just as smooth as current bills)

– Does not take away the incentive to reduce consumption during high-priced hours

– Precedent: Existing Pricing plans to smooth out monthly bill fluctuations

• Other “smoothing” options exist as well– RTP for incremental use (“base year” problems)


Limited experience with ToU Rates including RTP (for residential)

• No short-run experience will tell the long-term story

• Many time-sensitive rate offerings “hidden” or offered at a relatively high price

• Lack of commitment and marketing• Some encouraging recent experiences

– Energy Smart Pricing Plan

– CA Critical Peak Pricing Pilots


“Experience” with RTP needs to be interpreted with care

• Pilots have done their job of “proof of concept”• Pilots have not revealed the full set of benefits

– The “missing link” of technology to support changes in consumption

• Software (home automation, energy use monitoring, etc.)• Hardware (smart appliances, thermostats, etc.)

– Some early signs that providing the link will help• CA 2004/2005 Pilots very encouraging • Invensys GoodWatts ongoing in other places (Ashland, OR,

Nevada Power, etc)• Other emerging platforms (GoodCents)


Full benefits require a long-term commit-ment to smart metering and proper rates

• Pilots do show that– Consumers like choice, information and control– All rate classes exhibit substantial elasticity of demand

• Particularly strong evidence on critical peak pricing so far

• Some of the elasticity likely due to novelty and will/would wear off unless– Long term commitment to time-sensitive rates (probably RTP)– Movement over time from optional to mandatory?

• Technology costs will continue to decline– Current level “complete residential system” cost high (only pilots)– If deployed at large scale: $500+– Longer term goal $200-$300 (meter, programmable thermostats, DLC

devices, software)


What is a smart meter?

Smart meters: • Look like standard digital meters and fit into a standard meter base

(modifications are not necessary for most installations);

• Measure and store electricity consumption data over short time periods, usually an hour;

• Communicate electricity consumption data automatically to a central computer, usually by radio frequency or power line communications; and

• Do not automate any customer equipment or electricity usage patterns.

(Definition from Hydro Ottawa website, www.hydroottawa.com)


Smart meters are quickly becoming an economic “no-brainer”

• Substantial evidence that AMI likely pays for itself (without DR benefits)– Residential Meter installed+software $100/meter +<$1/month cost– Pay-back periods of 6-7 years

• Non-DR related benefits to utilities include– Less power theft– More accurate meter readings– Saved labor cost of manual/drive-by meter readings– Better distribution system control and planning

• Significant savings come from state/utility-wide deployment of AMI– Cost of installment– Maximum benefits to utility from AMI-based activities– Possible discounts on purchase price


..and more and more regions move towards system-wide deployment

• System-wide deployment makes sense and is cost-effective at multiple scales– From very large

• Italy (30,000,000 advanced meters, over 20m deployed), Victoria (Australia), Ontario (Canada), Sweden, CA

– To pretty small• Shawano, WI (6,000 meters)

• Vermont should seriously consider moving to state-wide AMI mandate


There are significant additional benefits for utilities, consumers, and society

• Advanced metering infrastructure is a necessary condition for implementing RTP and other time-sensitive rate structures.

• Permits a better understanding of localized consumption patterns and demand response opportunities with corresponding better planning of infrastructure development (T&D,etc).

• Advanced metering will help evaluate DG resources and - through RTP – would increase the value of some DG

• Appliance-level metering will provide additional benefits


Since smart metering will likely lower costs, funding should be possible

• Most business cases now conclude positive NPV without additional charges for meter– I.e. operational savings exceed cost of meter on NPV basis

• Typical pay-back periods 6-10 years• Some states allow cost recovery, others silent

– Could allow cost recovery but subject to utility showing that costs have actually increased.

– Impact on Asset base?– Could charge for the meter, but should result in lower rates over time (if

positive NPV for utility without charge)• Some utilities offering demand response plans do charge

– In VT possible legitimate capital constraints (Possible role for Efficiency Vermont?)


There is much room to expand RTP and related rates in Vermont

• Many VT customers are already familiar with time of use rates, past and present– Ripple Control– Existing ToU rates

• BUT: Existing time-of-use rates are– Not generally RTP, but simpler time-of-use rates– If mandatory ToU, limited to larger customer classes

• RTP for all customer classes should be the end goal, but may not be achievable right away

• Phase-in of RTP over time for all customer classes– More choices may be good BUT– Avoid confusion and too much administrative effort

• It will take a real commitment to make it work


How should Vermont proceed as a State• Statewide/Utility-wide Advanced Metering should be seriously considered

– Cost advantages from larger quantities– Could be faced in over time

• Real-time Pricing Pilots as a transition to permanent default solution– Make it “cool” to participate– Learn not so much about customer response, but about implementation issues

• Vermont should send a clear signal that RTP is coming and is here to stay!– Provide proper incentives for customers– Provide proper signal to vendors

• The bigger question:– Mandatory RTP versus voluntary RTP


Jürgen Weiss

Director, LECG, LLC

(617) 792.9055

[email protected]

Time-based Rates in VT

Documents

Transcript of Time-based Rates in VT