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Did Griddy Just Write an Obituary to Dynamic Pricing?

Ahmad Faruqui's picture
Principal Brattle

Ahmad Faruqui leads the firm’s practice in understanding and managing the changing needs of energy consumers. This work encompasses tariff design and evaluation, distributed generation, energy...

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  • Mar 3, 2021 6:45 pm GMT
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In the wake of the power crisis in Texas, some people are saying that dynamic pricing is dead. Well, let me draw inspiration from W C Fields who famously said, "The news of my death is greatly exaggerated." What may have died is the idea that residential customers should be exposed to totally unhedged hourly pricing that flows from the wholesale market. Why do that? First of all, hourly real time pricing (RTP) is one end of the spectrum. Other variants are discussed below. Second, RTP can be offered with price caps, floors and collars. Thirdly, RTP can be limited in its application to deviations from a historical reference load shape. It's important to note that dynamic pricing comes in many other flavors: variable peak pricing, critical peak pricing and peak-time rebates. There is a wealth of evidence from hundreds of pilots that dynamic pricing works. That claim is beyond dispute. Dynamic pricing will become a necessity as the grid is powered primarily by renewable energy. Load flexibility will be the need of the hour. There is no better way of creating load flexibility then to offer dynamic pricing to customers. 

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Bob Meinetz's picture
Bob Meinetz on Mar 3, 2021

Ahmad, how does thrusting the responsibility of providing sufficient electricity on customers improve their flexibility?

Seems most wouldn't want to have to consider using their electric oven at the wrong time of day might involve extra charges.

Robert Borlick's picture
Robert Borlick on Mar 27, 2021

Bob, if a customer doesn't want to be bothered worrying about when to use his appliances nobody is forcing him to do so.  He has two choices:  (1) use the appliances and pay the high electricity rates when they apply or (2) sign a contract to effectively buy electricity at a fixed price, which will include a substantial risk premium (because the counterparty to that contract is not going to assume the risk without being compensated).  

The advantage of dynamic pricing is relevant to the customer that is willing to alter his usage pattern in order to better control his electric bill.  It further reduces the overall cost of operating the system because less has to be invested in peaking plants that sit idle most of the time.

So Ahmad is correct.  Dynamic pricing empowers the consumer.  Forcing him to pay for a level of reliability that he does not want (or need) is disempowering him.  

Bob Meinetz's picture
Bob Meinetz on Mar 29, 2021

Forcing him to pay for a level of reliability that he does not want (or need) is disempowering him.

Robert, this is absurd. If you enjoy poring over your electric bill each month, and figuring out when is the most economical time to use your dishwasher or air conditioning, I would suggest you have too much time on your hands.

People who work a day job, or a day and night job, don't have that luxury. For them, not being able to use electricity on demand imparts a real and significant cost. And neither Ahmad nor I are "correct" - it's a matter of perspective. I see electricity rates skyrocketing, while utilities tell us customers can save money by using electricity at the right times.

Until you can show me a single individual who has actually saved money after the implementation of a "demand-response" program, I'll have to assume the "empowered customer" who has any control over his electricity bill (other than doing without it) is an invention of utility marketing departments - and apparently, a useful one.

"Demand-response" programs are an artifact directly attributable to incorporating of renewable energy. "Sure, we can give you a great rate when the sun is shining or wind is blowing - as long as it's not too cold. Then you might have to pay $90/kWh, but it's not our fault!". Please.

Robert Borlick's picture
Robert Borlick on Mar 31, 2021

Well Bob,

Since you have all the answers I won't attempt to reason with you.  You obviously know little about demand response.  It is not an "artifact" of renewable energy as it predates RE by decades.  

For your information I served as the Demand Resaponse Advisor to the Midwest ISO for a number of years.

BTW: The market cap in ERCOT is $9 per kWh.

PJ Davis's picture
PJ Davis on Mar 3, 2021

Great piece, Ahmad. Read the 'Obituary' on Griddy's site. Strange sign of the times. Thanks for taking the time to write up this outline. 

Rakesh  Sharma's picture
Rakesh Sharma on Mar 4, 2021

Ahmad, I am not really sure what you are trying to get at here. Is RTP an effective balance to unhedged pricing from wholesale markets? I don't think so. The idea of hedging exposure to wholesale prices is to protect the consumer from the changes in Texas's energy market prices. As Bob pointed out, you are simply transferring your responsibility to the customer. Demand is definitely an important part of the solution in a renewable-intensive market like Texas but I doubt if it is the only solution.  

Robert Borlick's picture
Robert Borlick on Mar 27, 2021

RTP is best combined with some form of hedging that allows the customer to decide how much of his load he wants to expose to wholesale market prices, presumably that portion which he can easily defer or do without based on avoiding payment of the market price.  

That is not transferring the responsibility of the grid to provide reliable service - unless you want to live in a nanny state where you are not allowed to decide for yourself what risks you want to take.  Furthermore, no power system can guarantee you 100 percent reliable service and most customers will gladly accept lower reliability in return for lower rates.  Why should they be denied that choice?

Robert Borlick's picture
Robert Borlick on Mar 27, 2021

Nice article Ahmad.  

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