There was a lot of finger-pointing about why residential dynamic pricing can’t gain a foothold in the United States during a recent Restructuring Today webinar called “Resurrecting the Money-Saving Promise of Residential Dynamic Pricing.”
Most of the fingers pointed straight at utilities. But after decades of inaction, researchers, consumer advocates and consultants have found common ground on how to bring residential dynamic pricing -- rather than just critical peak rebates -- to the masses. Here is their advice:
1. Build trust. “The well is kind of poisoned,” said Nancy Brockway, former New Hampshire PUC chairperson and principal at NBrockway & Associates. But that doesn’t mean that utilities can’t change. There is evidence that low-income and elderly consumers will actually benefit even more than the average person from dynamic pricing, so get the right consumer groups on board from the beginning, said Ahmad Faruqui, principal of The Brattle Group. Step one should be to bring stakeholders to the table.
2. Share the data. There is solid data from pilots, but unless it finds its way into all stakeholders’ hands, it is useless. Brockway, who was very skeptical of a utility’s ability to engage consumers on their level, noted that she had not actually seen a lot of the data from pilots that address low-income residents and dynamic pricing. Faruqui agreed that consumer advocates should be entitled to look at the data from pilots, which circles back to the first point of building trust.
3. Become the Orbitz of electricity. Utilities in competitive environments like Texas could benefit by becoming a place where people can shop for the best dynamic pricing rate, the way people shop for travel and insurance online, according to Peter Honebein, co-founder of Customer Performance Group, a consulting firm with utility clients. Clearly, this doesn’t work in a fully regulated environment, but even regulated utilities can offer calculators or pricing wizards to help customers find the best rate based on their usage. “We need to orchestrate the dynamic pricing experience,” says Honebein, which means blending goals and feedback through the pricing scheme.
4. Make sure there are training wheels. When Baltimore Gas & Electric was seeking approval for its smart grid plans, one element was squarely rejected: mandatory time-of-use pricing. But there are ways to carefully put every house on time-of-use pricing without infuriating everyone in the service territory. The key is to have price guarantees, under which for at least the first year, and maybe up to three or even five years, consumers will not pay more than they would have on the flat rate. If the entire U.S. had digital meters and dynamic pricing, the cumulative savings would be $7 billion, according to Faruqui. The key is who sees those savings -- and it should be customers, not just shareholders.
5. Provide insurance options. Similar to training wheels, there should be an opportunity for people to protect themselves, according to Paul Centolella, former chairman of the Ohio Public Utility Commission. Besides bill protections, consumers should be able to choose different options based on their risk preference. For instance, when the market price exceeds the strike price, he said, the customer could earn a rebate for using less energy. Centolella also called on regulatory innovation to enable pricing schemes like this. “Regulation needs to encourage technological and business model innovation,” he said. “In organized markets, the economic rationale for regulating price signals is largely unnecessary today.”
6. Move beyond the pilot. Faruqui is an academic, and decades ago, he told a colleague that there is tremendous value in pilots. Now, he’s not so sure. “The time has come to stop the pilots,” he said. “We’ve been doing pilots and little else for 30 years.” Many in the industry share his frustration. Arizona Public Service has more than half of its residential customers on dynamic pricing. Oklahoma Gas & Electric is going to move 150,000 customers to voluntary dynamic pricing. Brockway, who was skeptical about mandatory dynamic pricing, agreed that utilities need real-world successes, not just pilot examples. The only way to get there is to roll out innovative pricing programs and market them to customers.
7. Make it opt-out, not opt-in. Similar to offering insurance options, there should be an option for customers to opt out, said Faruqui. Although APS has more than 50 percent of its customers on dynamic pricing, an opt-in program realistically has a 25 percent or maybe 30 percent acceptance rate. With opt-out, however, people who don’t see any benefit after their first year on the program (with bill protection) could go back to their flat rate.
8. Set the right ratio. At Toronto Hydro, there is only a few cents' difference between the on- and off-peak rates. The result is that people barely shift usage, because there isn’t a strong enough price signal. OGE has an hourly range from $0.045 to $0.23, and $0.46 per kilowatt-hour for critical peak. At Salt River Project in Arizona, customers pay as little as $0.07 per kilowatt-hour in off-peak, and up to $0.35 per kilowatt-hour in the hottest hours in summer. Even though $0.35 per kilowatt-hour sounds ludicrous for summer in Arizona, people steadily sign up for the plan, and the average homeowner saves 5 percent of their bill annually. Research has found that a 10:1 ratio can get about a 20 percent peak reduction, and more if you add in smart thermostats. “Price matters,” urged Faruqui, “and electricity is no exception.”
9. Educate regulators. Just like everything else relating to utilities, educated and informed regulators are essential to change. Here is where rules No. 2 and No. 6 apply. Good data needs to be shared with regulators, and there should be a robust plan to move quickly beyond a pilot and into full deployment, in whatever form that is that works to meet the goals of the utility. Selling something to regulators is not only good business for the utility, but is also good for customers. “Regulatory support alone doesn’t make a sustainable business model,” warns Brockway.
10. Tell, don’t sell. So let’s say the regulators are on board, along with consumer groups. That still leaves the little problem of how the information is presented to customers. Some utilities, like Pacific Gas & Electric, shows customers different rate options online. But Honebein noted that means the customer has to already have an account then go to that webpage. And if you want to try out a new plan, it’s still multiple clicks away. “There’s no button that says ‘Just sign me up,’” he noted. “We have to help customers understand whether they’re better off [on a different plan].” This requires nudging, with a dash of creative marketing. If regulators will allow it, try some segmented marketing and different plans to see what sticks. “Trying things out and making it observable is key,” said Honebein.