Time-based Rates in VT Jürgen Weiss LECG, LLC

Time-based Rates in VT
Jürgen Weiss
[email protected]
Workshop on Smart Meters and Time-based Rates
Montpelier, Vermont
March 15, 2006
March 15, 2006
Jürgen Weiss – Time-based Rates in VT
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
March 15, 2006
Jürgen Weiss – Time-based Rates in VT
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
• 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!
March 15, 2006
Jürgen Weiss – Time-based Rates in VT
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
March 15, 2006
Jürgen Weiss – Time-based Rates in VT
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
March 15, 2006
Jürgen Weiss – Time-based Rates in VT
… and feasible for all customer
• 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)
March 15, 2006
Jürgen Weiss – Time-based Rates in VT
Utilities should like RTP and timesensitive 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
March 15, 2006
Jürgen Weiss – Time-based Rates in VT
…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
• 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?
March 15, 2006
Jürgen Weiss – Time-based Rates in VT
Potential longer term benefits should
also be considered.
• Paradigm shift for consumers, creating awareness of
electricity consumption more generally (including the time
– 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
March 15, 2006
Jürgen Weiss – Time-based Rates in VT
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 highpriced hours
– Precedent: Existing Pricing plans to smooth out monthly bill fluctuations
• Other “smoothing” options exist as well
– RTP for incremental use (“base year” problems)
March 15, 2006
Jürgen Weiss – Time-based Rates in VT
Limited experience with ToU Rates
including RTP (for residential)
• No short-run experience will tell the long-term
• 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
March 15, 2006
Jürgen Weiss – Time-based Rates in VT
“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
• 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)
March 15, 2006
Jürgen Weiss – Time-based Rates in VT
Full benefits require a long-term commitment 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
– 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)
March 15, 2006
Jürgen Weiss – Time-based Rates in VT
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;
• Do not automate any customer equipment or electricity usage patterns.
(Definition from Hydro Ottawa website, www.hydroottawa.com)
March 15, 2006
Jürgen Weiss – Time-based Rates in VT
Smart meters are quickly becoming an
economic “no-brainer”
• Substantial evidence that AMI likely pays for itself (without DR
– 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
March 15, 2006
Jürgen Weiss – Time-based Rates in VT
..and more and more regions move
towards system-wide deployment
• System-wide deployment makes sense and is costeffective 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
March 15, 2006
Jürgen Weiss – Time-based Rates in VT
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
• 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
March 15, 2006
Jürgen Weiss – Time-based Rates in VT
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
March 15, 2006
Jürgen Weiss – Time-based Rates in VT
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
March 15, 2006
Jürgen Weiss – Time-based Rates in VT
How should Vermont proceed as a
• Statewide/Utility-wide Advanced Metering should be seriously
– 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
• Vermont should send a clear signal that RTP is coming and is here to
– Provide proper incentives for customers
– Provide proper signal to vendors
• The bigger question:
– Mandatory RTP versus voluntary RTP
March 15, 2006
Jürgen Weiss – Time-based Rates in VT
Jürgen Weiss
Director, LECG, LLC
(617) 792.9055
[email protected]
March 15, 2006
Jürgen Weiss – Time-based Rates in VT