By Ahmad Faruqui and Jenny Palmer

The Brattle Group

I consider co-author Ahmad Faruqui North America's leading expert on dynamic pricing. He was kind enough to allow this sneak preview for SGN readers.

Here are the two myths we consider most damaging and dangerous – dangerous because they could cause utilities to unnecessarily delay dynamic pricing and the benefits it can bring. Download the full paper to read more. - Jesse Berst

Customers do not respond to dynamic pricing

The first myth is that customers do not change their behavior when faced with dynamic rates. However, almost all analyses of pilot results show that customers do respond to dynamic pricing rates by lowering peak usage. Indeed, in 24 different pilots involving a total of 109 different tests of time-varying rates — covering many different locations, time periods and rate designs — customers have reduced peak load on dynamic rates relative to flat rates, with a median peak reduction or demand response of 12%.

Almost 30 results fell in the range of 10 to 15%, and many more exhibited larger responses. In other words, the demand for electricity does respond to price, just like the demand for other products and services that customers buy. The contention that electricity is a necessity with zero price elasticity, and thus is not subject to the normal rules by which a market economy functions, is based on opinion and not fact.

Dynamic pricing will hurt low-income customers

Even when people agree that dynamic pricing works and is beneficial overall, there is disagreement about its impact on low-income customers. Some people speculate that because low-income customers typically use less power, they have little discretion in their power usage and are thus unable to shift load depending on price. As a result, low income customers would be negatively affected by a dynamic pricing model. However, empirical evaluation of this speculation has indicated that most low-income customers would immediately save money on their electricity bills from dynamic pricing. In general, when customers are placed on a revenue neutral dynamic rate, we expect roughly half of the customers to immediately see bill increases and half to immediately see bill decreases. Customers who use more load in the peak hours than the average customer would see higher bills, while customers who use less load in the peak hours than the average customer would see lower bills.

Using a representative sample of both average income residential and low-income residential customers from a large urban utility, we simulated the electricity bills for both groups of customers on flat, CPP and PTR rates. As expected, roughly half of the residential customers had higher bills on the dynamic rates, and half had lower bills. Because the low-income customers tend to have flatter load shapes, roughly 65% of the low-income customers were immediately better off on the CPP rate than on the flat rate. In other words, even without any change in electricity usage, more than half of low-income customers benefit from a dynamic rate.

Our review of these ten programs reveals that low income customers are responsive to dynamic rates, that many such customers can benefit even without shifting load, and that their degree of responsiveness relative to that of average customers varies across the studies reviewed. Some studies found that low-income customers were equally price responsive as higher income customers (as in the CL&P, BGE and Consumers Energy programs); others found they were less responsive compared to higher income customers.