PG&E 'Peak Day Pricing' Starts the Dynamic Pricing Marathon

One of the greatest risks to realizing the promise of smart grid is that politicians, regulators and utilities (in that order) will ‘chicken out’ when it comes times to move away from average cost pricing to dynamic pricing.  For consumers the risk is these policymakers will actually do it!  For utilities and policymakers the risk is they will not.

The truth is unless consumers are exposed to enough price volatility from rising and falling electricity prices sufficient to change their demand behavior we will never realize the benefits of smart grid.  I’ll use my own ‘sinful, wasteful energy hog ways’ to explain the dilemma.

Here on the warm side of the hills in my San Francisco Bay area suburb in the PG&E service territory the typical residential property uses lots of power for air conditioning (it’s hot here in summer) and for pumps and motors for swimming pools, spas, etc. (Hey, it was here when we bought the house—and it’s California after all—give me a break.) September is our warmest month and if I run my A/C for that month I will surely push my usage into Tier 4 or even Tier 5 (think of Tier 5 as A/C pricing hell!).  Last September 2009 was one of those months and my PG&E charges were more than $1,000—but I paid $682 on the level billing plan.  Of that $1084 in charges $1,007 of it was for electricity use and $77 was for natural gas.  Because of the progressive rate design in the tiered rate structure my average cost of electricity for September 2009 was twice the unit price or $0.3550/kWh compared to the March 2009 electricity price of $0.1834/kWh.

You see where this is going don’t you?

As long as I knew I was going to pay $682 each month, every month under the level billing plan I did not grouch at my family (too much!) about cranking the A/C down to sweater territory temps thus overriding my programmable thermostat setting of 78.  Over the course of 2009 my actual PG&E charges ranged from a low of $434 in March to $1,084 in September.  But if I had to pay that $1,084 bill instead—you bet I would have been a big pain in the neck to all around here.  It would have been cheaper to buy my wife a plane ticket to see her sister in British Columbia for September and just turn the dang A/C off.

DYNAMIC PRICING IS NOT OUR FRIEND

That is the typical customer reaction.  It sounds cool.  But it will steam you when it happens, usually as a bad surprise.  Dynamic pricing is the politically correct term for regulatory concept of “gotcha” which punishes you for the temerity to live on the warm side of the hills, for the audacity of having a swimming pool, and the stupidity of living in a high energy cost, crazy state like California instead of staying in Ohio (where you belong as my mother tells me) where things are cheap.

The concept of real-time pricing has been around as a regulatory idea for many years.  Rate designs have experimented with it, but no one is—so far—drinking that Kool-Aid for residential customers.  But this is California—land of risky business.

BUT CALIFORNIA IS MOVING TO DYNAMIC PRICING—GET USED TO IT

The California Public Utilities Commission is feeling lucky.  It is embarking on a strategy of slowly introducing dynamic pricing throughout the state starting with industrial, commercial and agricultural customers.[1] It has a benign sounding name: Peak Day Pricing and is part of a broader program of encouraging demand response on an estimated dozen or so peak use days in a typical year.[2] PG&E has been running TV and radio advertisements reminding these C&I and AG customers they were switched to this new pricing plan as a “default” rate structure on May 1, 2010 so they better be calling PG&E to figure out how it will affect them and how they can play the dynamic pricing lotto.

BUT PG&E GIVES ME THE ANSWERS ONLINE

While I often Monday morning quarterback PG&E, I want to give them credit for helping me understand my utility rates and charges with their online tools.[3] The PG&E website gives me usage information (not yet from my smart meter) and allows me to compare my usage between months and understand what is causing changes in my utility bill.  It’s easy and very helpful.

  • March 2010 electric charges were $51 higher than March 2009 due to a rate increase approved by the CPUC.
  • Electricity charges were $56 higher in March 2010 due to average daily usage increase.
  • Weather decreased charges by $8
  • Shorter billing cycles decreased charges by $5
  • Lower natural gas prices decreased charges by $50.34

PG&E is also taking steps in the aftermath of the Bakersfield incident to modify its tiered rate structure to reduce the pain for those of us on the warm side of the hills.  The five tier structure is being modified, assuming the CPUC approves, to three tiers.  This sets up the transition to dynamic pricing for residential customers to happen later by reducing the perceived unfairness of the progressive tiered rates.

So what?

The promise of smart grid is that smart meters will make the system more efficient.  But getting customers to change their energy behavior does not require a smart meter at all as anyone who has been surprised by a spike in utility bills can attest.  Dynamic pricing will do more than all those smart meters to improve efficiency—and complaints about high utility bills by giving customers price signals about what their energy use behavior is costing them.  But for dynamic pricing to work we must give up our level billing plans so we feel the brunt of the price change every month.  That is crossing the Rubicon for regulators and politicians.


[1] http://docs.cpuc.ca.gov/PUBLISHED/NEWS_RELEASE/85953.htm

[2] http://www.pge.com/mybusiness/energysavingsrebates/demandresponse/

[3] http://www.pge.com/

2 thoughts on “PG&E 'Peak Day Pricing' Starts the Dynamic Pricing Marathon

  • The real panic here should be on the part of folks (like me) living in areas where summertime temperatures routinely reach triple digits (101 yesterday). We do not have a choice as to if/when to run the aircon – and so will be severely impacted by the “Smart Meter” debacle. The untold story is that the new “dynamic pricing” is simply a way to enhance revenue for the utility, and through taxation – to the state. Imagine the laughter behind those closed doors – massive new tax revenue, further entrenchment of union graft – and all without a public vote and without risk to elected politicians. Brilliant!

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