Customer Choice in the Form of Energy Price Signals

Posted by Megan Hoye  |  Date February 9, 2015

Bringing energy pricing options to Minnesota that increase customer control, grid flexibility, and renewable effectiveness.

Under dynamic pricing, customers are charged energy rates that are meant to reflect the value of the energy at the time the customer consumes it. While there are some surmountable logistical challenges to rolling out these rate programs, there are many benefits.  The two primary benefits are that customers gain greater control over the cost of the energy they use, and utilities gain more tools to shift energy use “off-peak”, thereby helping to reduce the need for additional infrastructure.  Of course, the success of such alternative pricing programs is in the implementation details.

Now is an especially relevant time to be discussing dynamic pricing and how it could benefit Minnesota customers and utilities. While the lack of advanced meters in both residential and commercial structures is a huge barrier to implementing these programs on a broader scale, there are a growing number of communities that are in the midst of large site redevelopment and interested in energy demonstration opportunities. Redevelopment and new construction are prime opportunities to institute advanced meters and provide the necessary infrastructure to pilot dynamic pricing options for customers on a broader scale.

Currently in Minnesota the prices that most customers pay for electricity are fixed rates established through rate filings with the Minnesota Public Utilities Commission.  They are typically based on how much electricity is used and are generally not responsive to the daily, hourly, or real time markets for electricity. Dynamic pricing would allow customers to choose to pay less for power when it is less expensive to generate and transmit, and more when electricity is more costly. 

There are a number of flavors of dynamic pricing (yum!) that currently exist, with critical-peak pricing and time-of-use pricing being the two most common in the US. Under a time-of-use pricing structure, a Minnesota resident could pay $0.11/kWh to dry their clothes in the mid-afternoon (for a total cost of $17-$18 per year), or three to four cents less to dry their clothes in the early morning, which would save them $6-$7 annually. Of course, the converse could be true as well meaning that dynamic pricing could increase the costs for customers who use more energy during peak times. For this reason, customer communication is critical when implementing these programs.

Why Does This Make Sense for a Utility?

One of the greatest challenges utilities will face over the next 10 to 15 years is maintaining quality and low-cost of service in the face of generation resources reaching end of life. Developing new power plants and new transmission lines increases ratepayer costs and, in the case of fossil fuel generation plants, poses additional costs in the form of environmental impacts. Dynamic pricing is a demand side management tool that helps avoid these expenses. It can also help reduce wholesale market prices during peak times, making energy more affordable for all customers. 

While dynamic pricing is currently not a mechanism to help utilities meet energy conservation requirements (the approximate consumption reductions per residential customer are 3.3% according to a BG&E study and 1% according to a Hydro One Networks study), it can help integrate renewable energy into the grid. With the ability to shift demand with price signals, customer demand can be used as a flexible tool to allow utilities to accept variable energy sources, such as wind and solar, when they are available and decrease demand when they are not. 

Customer Benefits

Dynamic pricing provides customers with more rate options and more control over energy costs, with the tools to lower their peak demand and load factor. This has the effect of increasing customer satisfaction. Following the implementation of dynamic pricing programs, Sacramento Municipal Utility District (SMUD) has seen customer satisfaction increase from 80 percent to 87-89 percent. Through dynamic pricing programs, customers have increased opportunity to access lower cost energy, which can help manage rate volatility long-term. 

Dynamic pricing does have the ability to benefit some customers more than others. Residents that tend to use more electronics and appliances in the morning and evening will be better candidates for dynamic pricing. Residents with access to dynamic pricing programs can reduce their costs by taking a shower at night or keeping their space heater off in the evening and, in the not-so-distant future, customers could save more by setting their dishwasher to run or their electric car to charge when costs fall below a certain level. Additionally, multiple studies indicate that dynamic pricing would benefit 65 percent of low-income customers, many of whom typically use most energy during off-peak periods.

Existing Dynamic Pricing Programs

In northeastern Minnesota, Minnesota Power has been implementing a time-of-day (same as time-of-use) pilot for roughly 700 residential customers since October 2014. The pilot is part of a DOE Smart Grid study that helped to fund the in-home meter exchange needed to dynamically record customer consumption. The program provides three rate adjustments (on-peak, off-peak, and critical peak) as overlays to the existing residential five block rate system already in place. Customers can choose to adjust appliance timers and behavior according to on-peak and off-peak times, and can choose to be notified about critical peak pricing events via messages on the Minnesota Power website, email messages, automated phone messages, and possibly text by the time the program ends September 31, 2015. The pilot is testing how customers respond to these pricing events. While early round evaluations of the electricity demand impacts and customer satisfaction have yet to occur, overall resident interest in the program has far exceeded Minnesota Power’s expectations. “Customers were interested in more options, for a variety of reasons,” said Program Manager Lisa Beckner. 

In the summer of 2013, Baltimore Gas and Electric launched the first Behavioral Demand Response program (in conjunction with Opower) that offered peak pricing incentives. The pilot was very successful, saving customers an average of $6-$10 per peak event. The program is currently called Smart Energy Rewards^® and is a voluntary program offered to 315,000 customers. Residents and small businesses with advanced meters are notified via text or email the day before a peak demand event and given the option to opt in to receive credit for the energy they save compared to typical usage. 

The Opportunity

A significant barrier to dynamic pricing in Minnesota is that most utility customers have standard meters, which read how much energy is being consumed, but not when it is being consumed. Since advanced meter infrastructure is key for delivering dynamic pricing, we will need to see more initiatives in this area. Across the country some utilities are updating all customer meters in large swatches across service territories, while other utilities are upgrading meters of customers who voluntarily sign-up for dynamic pricing. This second approach may be appropriate for some Minnesota utilities. The former approach may work with instances of new community development and redevelopment, which could start off on the right foot by including advanced meters as standard practice, resulting in buildings that are dynamic pricing-ready. 

As Minnesota utilities consider dynamic pricing programs, there is much to contemplate. Implementing successful dynamic pricing programs require thoughtful consideration of pricing details, as well as customer education and communication to ensure customers understand how to access benefits of dynamic pricing, and if and how they would save money. Certain bill protection mechanisms may also be needed to ensure a smooth transition away from traditional rate structures. 

There is a growing need to provide customers with greater control over their energy use. While there may be hurdles to implementing dynamic pricing in Minnesota on a larger scale, it is one area utilities should continue to explore as they work to meet changing customer expectations.