Originally posted on EDF’s Energy Exchange.
Last week, Environmental Defense Fund (EDF) co-hosted a successful forum on residential time-variant electricity pricing – which allows customers to pay different prices for electricity depending on when it is used – within the context of New York’s ‘Reforming the Energy Vision’ (REV) proceeding.’
Co-hosted with the New York Department of Public Service and New York University’s Institute for Policy Integrity, the full-day forum, “On the REV Agenda: The Role of Time-Variant Pricing,” brought together more than 150 regulators, utility executives, academics, and other stakeholders to explore how residential time-variant pricing works, what it can accomplish, and how best to implement it. Below is a recap of some of the high-level takeaways from the forum.
How time-variant pricing (TVP) works
One of EDF’s objectives has been to improve the efficiency of the electricity industry by pursuing a market-based approach to electricity pricing. In most well-functioning markets, the cost of making a product and its relative scarcity is reflected in the price. For example, a door is more expensive than the wood with which it is made in order to reflect the labor costs involved. Similarly, strawberries are more expensive during the winter because they are less abundant during that time. Customers understand that prices vary with production costs and over time, yet neither of these elements gets reflected in how residential customers currently pay for electricity.
Types of Time-Variant Pricing
- Real-time pricing (RTP)– Prices vary frequently over the course of the day to reflect fluctuating electricity costs.
- Time-of-use pricing (TOU)– The day is broken out into two or three periods of time (e.g., peak period, off-peak period, interim period) whereby prices vary by period, but remain consistent from day to day.
- Variable peak pricing (VPP) – Similar to TOU, except that peak period prices change daily to reflect system conditions and costs.
- Critical peak pricing (CPP)– A critical event (such as a heat wave or power plant failure) is identified when the price may increase dramatically to reflect system conditions.
- Critical peak rebate (CPR)– Similar to CPP, except customers are paid for cutting back on electricity during critical events relative to the amount they normally use.
Most utilities around the country charge customers flat prices representing an average of the costs and scarcity over the entire year. With flat prices, customers often end up paying more than they should because that average includes some very expensive energy that is produced to meet spikes in demand that occur only a few times a year. Avoiding these spikes in demand would lead to lower prices, yet flat prices leave customers unaware of these high-cost times. Time-variant pricing (TVP), on the other hand, helps to bridge this gap by signaling to customers when costs are high, incentivizing them to cut back on electricity use or shift to times when electricity is cheaper.
Lessons learned from implementing TVP across country
Our forum helped shed greater light on this type of pricing through lively discussions and presentations by a range of speakers who’ve had experience implementing or analyzing TVP. Utility representatives and consultants presented on lessons learned from TVP programs in various states, including California, Oklahoma, Illinois, and Maryland, where utilities implemented very different types of pricing mechanisms. For example, time-of-use and critical peak pricing were implemented in California, while variable peak pricing was used in Oklahoma, real-time pricing in Illinois, and peak time rebates in Maryland.
Despite deploying different technologies and outreach methods, the utilities saw similar outcomes in all four states. Time-variant pricing led to substantial reductions in peak-time electricity use and customers reported that they liked being able to respond to price fluctuations. Regulators and consumer advocate groups have been concerned about the effect of TVP on low-income customers, but they, too, cut back on electricity use, and in some cases, reported even greater acceptance than more affluent customers. Another key factor affecting TVP adoption was how the choice was structured: i.e., whether customers were asked to opt-in to a voluntary TVP program or opt-out of a TVP program in which they were automatically enrolled. Utilities saw much higher TVP adoption as well as greater total peak demand reductions when customers were automatically enrolled in TVP and allowed to opt-out.
A panel on TVP considerations featured speakers doing a deeper dive on:
- Potential concerns regarding the impact of TVP on low-income customers;
- Environmental impacts of TVP, and;
- The role of customer-enabling technologies in reducing demand when paired with TVP.
TVP implementation in New York: opportunities and barriers
The forum’s final panel was of a more academic nature, bringing together thought leaders in the field to discuss the future of TVP in New York’s reformed electricity system. Stanford University Economics Professor, Dr. Frank Wolak, argued that utilities should provide real-time pricing (RTP) to residential customers. He recommended that RTP be levied only on the portion of a customer’s bill that reflects the costs of generating electricity. He noted that customers in New York have the flexibility to go to a third-party energy service provider and choose a flat rate if they wish to avoid the fluctuation in prices brought on by RTP. The panel also discussed how time-variant pricing can be implemented for the portion of a customer’s electricity bill that reflects a utility’s infrastructure investments (i.e., the delivery portion of the bill). These charges would help utilities avoid future infrastructure investments, such as substations, resulting from elevated peak demand.
Unfortunately, there are significant barriers to TVP implementation in New York State. For starters, customers don’t have the type of advanced, or smart, meter that provides detailed data on how much electricity is used each hour or minute of the day, making it impossible for utilities to bill on a time-variant basis. This theme was repeated throughout the day, with many presenters stressing the importance of utilities investing in an advanced metering system.
Another barrier to widespread TVP implementation in New York is the lack of incentive for utilities to make changes that would help them reduce costs, such as TVP. Instead, the current system reimburses the utility for incurred investment costs, creating a perverse incentive to spend more and avoid implementing TVP. The REV proceeding is looking into changing how utilities are paid (for example, based on performance rather than expenditures). This provides an ideal opportunity for the state to introduce time-variant pricing as part of a reformed electricity system.
Our successful forum not only helped reinforce the idea it is time to begin implementing TVP in New York but also offered guidance on the best way to do so. We hope the understanding gained from the forum will help guide the path to a cleaner, more efficient electric industry in New York.
For more information, check out our new time-variant pricing fact sheet.