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Berkeley Lab Researchers Compare Experience with Real Time Pricing as a Default or Optional Service in States with Retail Choice
Berkeley, CA—In a recently released study, researchers at the Department of Energy’s Lawrence Berkeley National Laboratory (Berkeley Lab) and Neenan Associates compared the experience of eight states with retail choice where real-time pricing (RTP) has been adopted as a default or optional service for commercial and industrial (C&I) customers.
Charles Goldman, a co-author of the report, explains, “This report is the first to broadly survey experiences in the U.S. where Real Time Pricing has been considered or adopted as the default service, and to characterize the associated impact on the development of price responsive demand. We find that default service based on day-ahead, hourly pricing, if properly configured, appears to both promote retail market development and demand response (DR).”
Bernie Neenan, another co-author, adds, “In order to draw out the implications of designating RTP as a default service, we also looked at several states with retail competition where RTP has instead been offered as an optional alternative to a fixed-price default service.”
This research, funded by the California Energy Commission (CEC)’s Public Interest Energy Research (PIER) program and coordinated by the Demand Response Research Center (DRRC), is based on interviews with key stakeholders in each study state and a detailed review of the regulatory history and other public documents.
Default RTP Tariffs Associated with High Switching Rates
As of early 2005, RTP was the default service for
large C&I customers of all investor-owned utilities in New Jersey, Duquesne
(DLC) in Pennsylvania, and Niagara Mohawk (NiMo), a National Grid Company, in New York. In all three cases, the majority of customers in the default RTP class have switched to a competitive supplier, although the percentage remaining on default RTP varies significantly – from 3%
for DLC to approximately 34% for NiMo.
Galen Barbose, lead author of the report, explains, “The relative maturity of the retail market in each of these regions differs, so customers in each default RTP class may not have equal degrees of access to attractive offers from competitive suppliers. Tariff design features may also be important, such as the fact that NiMo’s default RTP service provides customers with day-ahead price notice, while the default RTP service offered in New Jersey and Pennsylvania is indexed to the PJM real time market, for which hourly prices are effectively known after the energy to which they apply has been consumed. Accordingly, customers in the latter two cases have less opportunity to manage their price risk by responding to hourly prices.”
Competitive Retail Suppliers Offer Dynamic Pricing Arrangements with Flexible Hedging Options
The researchers interviewed eight large, competitive retail suppliers about the types of pricing arrangements they offer to large C&I customers in these states. All of the suppliers reported offering customers the opportunity to purchase their load at prices indexed to the regional real-time or day-ahead spot market. They all also reported offering “block-and-index” arrangements, whereby customers can purchase fixed quantities of load at a pre-established price and buy their remaining usage at hourly, spot market indexed prices.
“Apparently, there has been some uptake of spot market indexed pricing
arrangements,” says Mr. Goldman, “although it seems to vary quite significantly
across different markets. Among the eight suppliers we interviewed, anywhere
from 5% to 75% of their C&I load in various markets is currently facing spot
market prices on the margin. That is a fairly encouraging sign for the
development of price responsive demand.
What remains to be seen is how this plays out over the long run –if greater spot market price volatility returns.”
Information About Customer Price Responsiveness is in Short Supply
Formal analyses of customers’ price responsiveness have been performed for only two of the eight cases profiled in the report: Niagara Mohawk’s default RTP service and Georgia Power Company (GPC)’s optional RTP program. Both provide customers with day-ahead notice of hourly prices, and GPC offers an hour-ahead option as well. These RTP programs have been found to elicit load reductions in the range of 10-15% of participants’ aggregate billing demand when hourly prices are high.
“But none of the RTP tariffs that are indexed to real-time market prices have been subject to any formal evaluation of customers’ price response,” says Neenan. “At this point, we can’t draw firm conclusions about the magnitude of the resulting price responsive demand. But the utility and regulatory staff we interviewed generally shared the view that customers remaining on these RTP tariffs do not actively monitor or respond to hourly prices – either because hourly prices have remained low or because prices are not known until after the fact.”
Recommendations for Developing Price Responsive Demand
The authors of the report offer policymakers a number of recommendations for encouraging the development of price responsive demand. “One of the key recommendations to come out of this study is that, in states with retail choice, a default RTP tariff indexed to day-ahead market prices appears to be a useful strategy for simultaneously advancing policy goals for retail market development and demand response,” says Goldman. “It supports customer choice by moving customer hedging decisions into the competitive market. But it is also an effective mechanism for inducing load reductions from customers remaining on the rate when spot market prices rise.”
“Another important policy implication of this work,” adds Neenan, “is that a great deal more data and analysis of customer exposure and response to spot market-indexed competitive supply contracts is needed to support critical policy and planning decisions. This is something that state and federal policymakers or regulatory agencies should seriously consider so that market stakeholders can gauge the amount of price responsive demand in the market.”
The study is titled “Real Time Pricing as a Default
or Optional Service for C&I Customers: A Comparative Analysis of Eight Case
(LBNL-57661), and is authored by Galen Barbose, Charles Goldman, Ranjit Bharvirkar, Nicole Hopper, and Michael Ting of Lawrence Berkeley National Laboratory, and Bernie Neenan of Neenan Associates. Download it at:
DRRC website: http://drrc.lbl.gov/drrc-pubs2.html
EETD website: http://eetd.lbl.gov/EA/EMP/drlm-pubs.html
The Environmental Energy Technologies Division conducts research and development leading to better energy technologies and reduction of adverse energy-related environmental impacts. It is a division of Berkeley Lab. See http://eetd.lbl.gov .
Berkeley Lab is a U.S. Department of Energy national laboratory located in Berkeley, California. It conducts unclassified scientific research and is managed by the University of California. Visit our Website at www.lbl.gov .
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