The ongoing debate for utilities in dynamic pricing is how to properly incentivize people……….without creating backlash over assumed pricing increases. Do you punish customers by charging more for electric use during peak times(Critical Peak Pricing) or reward customers by giving rebates for using less energy at peak times(Peak Time Rebate)? The Carrot vs. The Stick
The way these two programs might work are as follows:
Critical Peak Pricing(CPP) vs. Peak Time Rebate(PTR)
Tiers of pricing:
– Critical peak– 12-7pm on weekdays for 10-15 days(120 hrs max per year and no longer than 5 consecutive hours)
– On peak– 10am-8pm on weekdays
– Off Peak – all other hours including weekends and holidays
At the present time, utilities seem to be more willing to reward customers for good behavior rather than punish them. However, this is not necessarily because peak rebates are more effective than peak pricing increases. The reason rebates have become more popular is because they offer no downside for the customer, only the benefit of possibly saving money if they use less energy during peak hours. According to results from Pepco Holdings’ “PowerCentsDC” pilot program, which compared three different rate structures: one using real time pricing, one using “critical peak pricing” with a .75 cent surcharge during critical peak hours, and one using “critical peak rebates” with a .75 rebate during critical peak hours. The results showed that customers using CPP reduced their overall energy usage by 22-34% compared to 9-15% of customers using PTR. Despite the overwhelming evidence that CPP is more effective Pepco plans to use rebate incentives in the future because “Our general sense is that consumers would prefer a rate structure with no downside,” says Steven Sunderhauf, a program manager for Pepco. Other utilities such as Baltimore Gas & Electric say that their pilot program “Peak Rewards” has reduced energy usage from 22-37% rewards systems.
The graph below shows the reduction of load from different pilot projects across the US using CPP without technology such as smart thermostats, PTR, and CPP with technology.
Although there have been less pilot projects using PTR than CPP, the results show that CPP is significantly more successful at reducing load. So why are many utilities deciding to use PTR instead of the more effective CPP programs??? The main reason is that they don’t want to deal with the PR headaches of explaining to customers why they are all of a sudden being charged exorbitant rates to use electricity on a few days of the year.
Instead of going down the road of using the less effective PTR programs, I think money should be put towards educating consumers about the benefits of CPP. The stimulus bill already includes provisions for $8B of investments into smartgrid projects, Why not spend some of that money on advertising to encourage the adoption of the right kind of pricing mechanisms? The reality is that customers overall electric bills will decrease by using the program that most effectively curtails peak load because utilities can then decrease their need for the most expensive generation. One concern about CPP is that some customers have no choice about when they use electricity such as senior citizens that need it for medical devices and businesses that must run certain machines. This could be addressed by offering exemptions to certain qualifying parties to reduce public backlash. I understand it will be difficult to gain public support for a program that raises energy prices, but I think properly handled the public could understand why and how it would benefit everyone.