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Real-Time Pricing and Related Successful Products

Real-Time Pricing and Related Successful Products. Michael T. O’Sheasy Vice President Christensen Associates. What is Real-Time Pricing?. An electricity rate structure in which retail energy prices: vary frequently ( e.g ., hourly), with short notice ( e.g ., hour-ahead or day-ahead),

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Real-Time Pricing and Related Successful Products

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  1. Real-Time Pricing and Related Successful Products Michael T. O’Sheasy Vice President Christensen Associates

  2. What is Real-Time Pricing? • An electricity rate structure in which retail energy prices: • vary frequently(e.g., hourly), • with short notice(e.g., hour-ahead or day-ahead), • to reflect expected hourly costs

  3. Topics • Tenets of Real Time Pricing (RTP) • RTP at Georgia Power Company • Why does an RTP Product make sense (and cents)? • Features of a Two-Part RTP and resultant prices • Price Response and Market Effects • PPP and Portfolio Pricing • Related Demand Response Products

  4. Efficient RTP Pricing 1. To ration supply on anything other than price invites disaster. Price may not be the only solution but it is efficient because it recognizes that value is specific to consumers and dynamic.

  5. Efficient RTP Pricing 2. Large social benefits can be achieved by offering dynamic pricing to larger customers (i.e. your grandmother need not be on RTP).

  6. Efficient RTP Pricing 3. Efficient RTP pricing will inherently reorder competing players into cooperative teammates producing win-win solutions. One participant voluntarily forgoes consumption of a kWh while another participant eagerly consumes a kWh. The whole key here is that kWh value is not only user specific but dynamic in essence.

  7. Electric Utility AtmosphereGeorgia Power Company Early ‘90’s • Competitive Electric Suppliers • Sufficient Base Load Capacity • Peaking Requirements in 1996 • Short Run Marginal Cost < Average Embedded • Competitive Region

  8. RTP Pilot Highlights • Customers say they want: • Greater control over their bill • Simpler, more straightforward rates • No demand ratchet or demand charge • True real time pricing

  9. RTP Pilot Highlights • Prices based on hourly marginal cost will: • Send correct price signals that vary with time • Communicate true production and transmission cost of electricity • Lower prices to customers in most hours • Lower GPC’s costs by increasing plant utilization • Improve customer value and satisfaction

  10. RTP Pilot Highlights • Tariff will contain 2 parts: • Access Charge • Bridges gap between marginal revenue and embedded revenue requirements • Insures revenue neutrality; protects non-participants (and GPC) • Marginal prices vary by hour (from 2 cents to 25 cents per kWh in the first year)

  11. RTP Pilot Highlights • Tariff is revenue neutral if customer makes no response • Test pilot provides experience while limiting risk • Up to 25 test customers and 25 control group customers • 2 year duration • Measure customer response to varying prices

  12. RTP Pilot Highlights • Summary • Responds to rate needs expressed by customers • GPC will research new innovation; EPRI will participate • Large potential to benefit customers, State, and GPC

  13. RTP Pilot Objectives • Reduction in System and Customer Cost • Increase Earnings Margins • Increase System Reliability • Improve Customer Satisfaction • Feedback on Price Sensitivity

  14. Real Time Pricing Pilot Program Details • Hourly dynamic prices follow the changing cost of power • Service is firm • Price is per kWh for each hour. No demand charge • Each day’s prices sent the previous day via electronic mail • Access charge for (or credit) assures revenue neutrality

  15. RTP in the State of Georgia Year 2001 • Largest Program in the World • > 1600 Customers • > 5,000 MW • > $1 billion revenue • IRP Resource • Increasing Marginal Cost • Day-Ahead and Hour-Ahead

  16. Real-Time Pricing for GPC • Two-part tariff design • Day-ahead RTP • 250 kW minimum • Hour-ahead RTP • 5 MW minimum • IRP • Other rate design

  17. GPC Philosophy on RTP 1. RTP is our marginal cost of producing electricity • Lambda • Losses • Marginal Cost of Transmission • Outage/ct Cost • Risk Adder

  18. GPC Philosophy on RTP 2. GPC prefers low prices • Customers Satisfaction • Economic Development • Customer Choice • Constant Profit Contribution per kWh • Credits below CBL

  19. Product Characteristics Create Risk Ave ¢/KWH Expected • Cost Risk • Load Shape Risk Scenarios Target Customers Load Shape TOU Prices On peak and off peak prices* based upon forecasted load shape Off Peak On Peak Off Peak On peak and off peak prices* based upon actual load shape Target Customers Actual Load Shape KW ¢/KWH Target Customers Forecasted Load Shape Hours Hours *Assume Actual Hourly Prices equal Forecasted Hourly Prices

  20. Electricity Product Characteristics • Storage/Inventory • Cost Volatility • Historical Purchasing “rights” • Transportation Constraints

  21. Customer Risk Propensity Drives Portfolio Pricing • Flat and Blocked Energy • Customer Energy Demand (CED) • Hours Use of Demand (HUD) • Time of Use (TOU) • Interruptible Service (IS) • Real Time Pricing (RTP)

  22. Risk on Seller 100% 100%, 100% • Flat Bill • Flat Energy • HUD • Curtailable Energy Load Shape Risk on Seller • CED • TOU • 1 Part RTP • 2 Part RTP 0 100% Cost Risk on Seller

  23. Features of “Two-Part” RTP • Customer pays for a baseline level of usage (e.g., recent historical usage) at standard tariff prices • Differencesin usage from the baseline (increases or decreases) are billed at RTP prices

  24. Features of “Two-Part” RTP • Customer revenue neutralat baseline usage • Demand response benefits the RTP customer, the utility, and all other customers

  25. Two-Part RTP Bill Standard Bill Load Hour RTP Bill  M.C. Hour x = + Customer’s bills change from their “Standard” Bill only when they change their hourly loads from the “Baseline” load shape

  26. Implicit Contract Under Two-Part RTP Part One – Baseline load • Payment for baseline load:Billed at standard tariff kWh CONTRACT Current Tariff Baseline Charge @ 1 24

  27. Implicit Contract Under Two-Part RTPPart Two – Incremental load • Incremental energy charge:Differences between baseline and actual usage are billed at RTP prices that reflect wholesale costs CONTRACT kWh Market Price @ Incremental Energy Charge 1 24

  28. Example of Incremental Energy Charges (Relative to Baseline) Customer “sells” load at high RTP prices MWh CBL Customer “buys” load at low RTP prices Actual load 1 24 Hour of Day

  29. Summary of Two-Part RTP Structure • Customer buys their CBL at standard tariff prices according to mutually agreed upon contract • Customer buys or sells electricity (relative to the CBL) to suit their needs in each hour at prices based on a forecast of the wholesale market prices

  30. How are RTP Prices Calculated? • Fuel plus variable O&M of incremental generator or a purchase (system lambda) • Stable in most hours • Higher on high-load days • Losses between generator and customer meter • Varies by hour • Greater in high-load and/or hot weather

  31. How are RTP Prices Calculated? • Four (4) mills per kWh contribution to fixed costs • Helps recover fixed costs • Compensates for risks • Protects non-participants

  32. How are RTP Prices Calculated? • Incremental transmission cost • Occurs on summer weekday afternoons • Expect 200 to 300 hours per year • About 2-10 cents per kwh • Reflects transmission capital costs • Assigns costs to appropriate hours • Assigns costs to those causing it • Reliability (or scarcity) value • “Loss of load probability” • Realized in “capacity constrained” hours • Expect about 50 hours per year

  33. Factors with Major Influence on RTP Prices Weather Economy Fuel Price RTP Prices Unit Availability Wholesale Market Tie Lines

  34. HR* cent/kWh status 01 3.1440 A 02 3.1151 A 03 2.9661 A 04 2.9329 A 05 2.9307 A 06 2.9384 A 07 2.9980 A 08 3.0449 A HR* cent/kWh status 09 3.0531 A 10 3.6141 A 11 4.7617 A 12 5.2418 A 13 7.8890 A 14 39.1817 A 15 79.3005 A 16 109.7100 A HR* cent/kWh status 17 89.4200 A 18 49.5094 A 19 29.2998 A 20 8.2002 A 21 7.6772 A 22 5.2903 A 23 3.6407 A 24 3.2380 A *Hour at end of interval GPC’s RTP-DA Prices

  35. Events of Last July Load Spot HA Price Day Hour (MW) ($/MW) (¢ents) 7/30 1200 36,168 240 24.62 1300 37,600 430 48.56 1400 37,863 800 86.42 1500 37,592 106 18.20 1600 37,500 6300 642.66 1700 37,000 5200 527.68 1800 36,100 138 18.87

  36. Do Customers Respond to RTP? Summary of Findings • Portion of customers found to respond significantly to RTP prices: 60-75% • Range of flexibility parameters: .01 - .40 (Approximately equal to negative of own-price elasticity)A short-period price spike of 10 to 20 times the typical price can yield load reductions of 10 to 20% (e.g., 150 MW from 1,000 MW of load)

  37. Typical Load Response 10 Increased Usage In Low-Priced Hours and No Response in High-Price Hours 9 (Hiding behind the Baseline Load) 10 8 9 7 8 7 6 6 5 0:00 4:00 8:00 12:00 16:00 20:00 24:00 5 4:00 0:00 8:00 12:00 16:00 20:00 24:00 No Response in Low-Price Hours and Increased Usage in Low-Price Hours Decreased Usage in High-Price Hours Decreased Usage in High-Price Hours (Peak Shavings) 10 10 9 9 8 8 7 7 6 6 5 5 0:00 4:00 8:00 12:00 16:00 20:00 24:00 0:00 4:00 8:00 12:00 16:00 20:00 24:00 Increased Usage in All Hours

  38. Demand Profile

  39. Distribution of RTP Price ElasticitiesSIC 20 Food Products

  40. Distribution of RTP Price ElasticitiesCommercial Office Buildings

  41. Distribution of RTP Price Elasticities Schools and Universities

  42. Distribution of RTP Price ElasticitiesSupermarkets

  43. RTP-DA Prices and Load Response, by Price Day-type Reference Load Load at moderate prices Load at highest prices Highest prices Moderate prices Reference prices

  44. Price/Load Response RTP-DA

  45. RTP-HA Prices and Load Response, by Price Day-type Reference Load Load at moderate prices Load at highest prices Moderate prices Highest prices Reference prices

  46. Price/Load Response RTP-HA

  47. Georgia Power’s RTP Load Response Modeldeveloped by Christensen AssociatesJanuary, 2001 Prices ($/MWh): Hour Index Hour Day-Ahead Hour-Ahead 1 12 am - 1 am 23 149 2 1 am - 2 am 22 57 3 2 am - 3 am 22 40 4 3 am - 4 am 22 24 5 4 am - 5 am 22 22 6 5 am - 6 am 22 22 7 6 am - 7 am 22 22 8 7 am - 8 am 23 22 9 8 am - 9 am 24 22 10 9 am - 10 am 38 28 11 10 am - 11 am 413 40 12 11 am - 12 pm 661 66 13 12 pm - 1 pm 1,000 102 14 1 pm - 2 pm 1,326 262 15 2 pm - 3 pm 1,445 280 16 3 pm - 4 pm 1,705 265 17 4 pm - 5 pm 1,791 259 18 5 pm - 6 pm 1,937 268 19 6 pm - 7 pm 1,784 255 20 7 pm - 8 pm 1,443 238 21 8 pm - 9 pm 1,181 217 22 9 pm - 10 pm 662 208 23 10 pm - 11 pm 465 199 24 11 pm - 12 am 344 202 Enter Time Period: July 16 - Aug 15 Enter Day Type: Monday Maximum Temp (deg F): 95 Minimum Temp (deg F): 78

  48. Predicted Load Change

  49. Implications for Demand-Side Strategies Retail Demand Supply $400 $200 $70, Retail MWs Demand response – e.g., RTP – an essential market feature market prices sensitive to demand at high demand levels (elasticity  12)

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