Consumers really don’t want dynamic pricing? An expert answers
By: SGN Staff
We recognize it when we see it in politics and public life. Conspiracy theories and oddball opinions that persist even though we have ample evidence to the contrary.
We have a similar situation in electric power. Many people - sincere, smart people - are convinced that customers don't like dynamic pricing. They are so sure of this theory that they sometimes don't even think the topic is worth discussing.
But as you will read below, customers do appreciate dynamic pricing in many other industries. And would appreciate it in our industry if we explained it correctly. It would appear that we are using "consumers don't like it" as an excuse. And who would know better than Ahmad Faruqui, probably the planet's leading authority on dynamic pricing for electricity. He says it is past time to implement dynamic pricing. Use the comment form to agree or disagree. - Jesse Berst
By Ahmad Faruqui
Whenever the topic of dynamic pricing arises at regulatory or utility conferences, the Pavlovian response is: "Consumers don't want it." Much to my surprise, I recently heard the same comment at a professional society meeting in Vancouver, Canada. However, this time the skeptic was not a consumer advocate, regulator or utility executive, but a seasoned expert on electricity markets.
I was one of six panelists on the integration of retail and wholesale power markets. The other speakers discussed new developments in dynamic pricing in a variety of energy markets ranging from the Pacific Northwest to the Midwest to the Netherlands. I discussed how real-time pricing in conjunction with home energy automation could usher in a new era of fast and predictable demand response. I coined this application "Dynamic Pricing 2.0" and stated that this would allow for the grid-integration of renewables.
Will Dynamic Pricing 2.0 succeed?
Then I posed the question whether Dynamic Pricing 2.0 would succeed where Dynamic Pricing 1.0 (critical or variable peak pricing) had failed. As evidence of this failure, I adduced that while advanced metering infrastructure (AMI) now embraced one out of every four households, Dynamic Pricing 1.0 (critical-peak pricing and variable-peak pricing) only reached at most one of every hundred households. The stark contrast evoked the skeptical comment that 2.0 would fail just as miserably as 1.0 because "consumers don't want it." The only evidence that the speaker adduced in support of his claim was that consumers want simple cell phone plans.
Facing up to the skeptics
Isn’t it time to put a few questions to the skeptics? Did consumers who don’t use much power during peak hours ask if they should subsidize other consumers who use a lot of power during peak hours? That is what happens under flat rates. Did single-family homeowners ask if they should subsidize apartment dwellers? That is what happens under inclining block rates. Did average-income consumers ask if they should subsidize low-income consumers? That is what happens when discounts are given to low income consumers.
In many states, time-of-use rates are mandatory for commercial and industrial customers above a certain size. Did they ask for these rates? In most restructured states, large commercial and industrial customers are defaulted onto hourly prices. Did they ask for that?
Of course, the answer to all these questions is no. Even then, these actions still happened. Why? Because someone with the power to make decisions about electricity thought it was good public policy. After all, electricity is an infrastructure service that is "affected by the public interest.”
Dynamic pricing is good public policy. It promotes economic efficiency and eliminates cross subsidies. So why should it not be done? The main objection used to be that it can’t be done without AMI. Well, now that AMI is in place, why are we waiting for Godot?
Ahmad Faruqui is a Principal with The Brattle Group. He has consulted with utilities, commissions, system operators, governments and private companies throughout the globe. An expert on demand forecasting, rate design, energy efficiency, demand response and dynamic pricing, he has authored or co-authored more than 150 papers and co-edited four books on energy policy. Ahmad holds a doctoral degree in economics from the University of California at Davis and bachelors and masters degrees from the University of Karachi.