Smart grid needs smart pricing

Billions lost to current structure
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While most of the U.S. is moving to develop a smarter grid, many utilities still implement tired, static rate structures – a practice that is costing the industry and customers both energy and financial savings.

As energy demand and rates continue to rise, utilities and customers want to reduce consumption and save money. Adjusting rate structures is one avenue to accomplish this, according to speakers at a recent demand response meeting in Washington, DC.

In fact, the Brattle Group estimates that the country loses approximately $10 billion in savings each year due to flat-rate pricing. This includes $7 billion in lower energy costs and $3 billion in reduced cross-subsidies, according to Ahmad Faruqui, a principal researcher at the Brattle Group. Right now, only about 1 percent of customers in the U.S. are on time-based rates, he noted.

In another analysis, CNT Energy simulated the effect real-time pricing would have if applied to Illinois' customers. The data, taken from sections of ComEd's three million customers, showed that almost two-thirds of these customers would save an average of $50 annually through a real-time pricing system, a median savings of 9 percent and a statewide savings of more than $6.5 million.

Despite the fact that large utilities and Public Utility Commissions in states such as Ohio are starting to look into dynamic pricing models, the industry as a whole remains hesitant to move toward time-of-use pricing for three main concerns, Faruqui said. These include: fear that customers won't respond to dynamic pricing; fear that customers won't persist in using the program; and fear that low-income customers will be harmed.

Faruqui aimed to assuage these fears by noting data showing that about 60 percent of customers and 80 percent of low-income customers save money under time-of-use pricing models, even without demand response.

But no matter what rate the utility implements, it needs to be financially attractive as well as simple for customers to use, according to Chris King, a smart grid CRO at eMeter.

"You will not manage what you don't have an incentive to manage or don't understand how to manage, even if you have the information," he said, during the panel. "Outside of this industry, we know people don't want to spend a lot of time thinking about their electricity."

The bottom line is that utilities must ensure that customer needs remain front-and-center through the rate-design process, according to Judith Schwartz, President and founder of To The Point.

"The best rate is the one that will fit your lifestyle and how you want to live your life," she said.

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