When it comes to the residential side of the smart grid, the utility industry is bogged down in a quagmire of confusing terminology. I reached this conclusion when conducting research for our upcoming GTM Research report on home energy management. A shocking number of documents from authoritative industry sources use conflicting and inconsistent terms to describe the same basic thing: “dynamic” pricing plans.
It’s time to clean house, and that’s what this article aims to do.
The risk is huge. If the industry itself can’t talk in straightforward plain English when it attempts to describe new pricing plans, how can it expect to garner trust when it tries to rollout new smart-meter-enabled programs? The industry already has its back to the wall trying to explain smart meter surcharges. Plus, a fringe group of consumers concerned about health impacts from smart meter radio frequencies are becoming increasingly vocal.
Why add self-inflicted wounds caused by arcane industry jargon?
The silver lining of low public smart grid awareness is that the industry has a golden opportunity to straighten up its act for prime time (also known as when regulated utilities go to PUCs with hat in hand asking for new smart meter enabled rate structures, then turn around to explain them to their residential customers).
Here, we propose an improved lexicon for residential energy management:
- Time of Use Pricing. The term “time of use” has fallen on hard times. It has become ambiguous. In the past, it was used to refer to static tiered rates for different times of day. For instance, 'peak rates' applied weekdays from 9 a.m. to 5 p.m.; 'shoulder rates' applied from 5 p.m. to 9 p.m., 'off-peak rates' applied during low-use periods, and so forth. More recently, 'time of use' has taken on new connotations as a way to describe time interval consumption metrics that are made possible by smart meters. A more appropriate term for historical static rate block pricing is Tiered Rate Pricing, since static time windows, as opposed to grid dynamics, and time interval smart meter readings, determine prices.
- Peak. The industry has run completely amok with its use of this term. In the old 'time of use' world, peak meant the most expensive rate tier (see above). In the smart grid era, 'peak' refers to a limited time-window when demand spikes and expensive, low-utilization gas-fired peaking generators (there’s the p-word again) fire up to quickly ramp production up to meet demand. With smart meters, utilities can measure which customers are causing the spike and charge more for power they consume – or, conversely, reward people who cut back. In our new lexicon, we use “peak” in a smart grid context, which means we need to find new, descriptive words for the old tiered rate plans. Why not use simple terms like High/Medium/Low (Tier or Rate) or Maximum/Mid/Low (Tier or Rate)?
- Dynamic Pricing. This has become an umbrella term used to refer to new rates that take the dynamics of power and supply into account. However, Tiered Pricing, as described above, is sometimes mixed in with new smart grid pricing plans, resulting in utter chaos, where no one has a clear understanding of what anyone else is talking about. Most other industries would simply refer to variable prices or rates as just that, Variable Rate Pricing or Variable Rate Hourly Pricing or Real-Time Pricing – simply put, the industry is at a loss for ways to describe something very simple: retail rates tied to wholesale prices. Most other industries would refer to the wholesale rate as a market index for setting prices. The term Market Indexed Pricing would align energy industry terminology with general business language. How frequently this is done (hourly, every fifteen minutes, instantly) is merely a matter of market rules for setting prices, which, by the way, may change over time. It probably doesn’t make sense to march down the path of replacing “hourly pricing” with “fifteen-minutely pricing” or some such nonsense.
Critical Peak Pricing. This is a smart grid term for charging higher prices during unusual circumstances when demand spikes – also known as peak demand. The actual mechanics of rate setting are such that the grid operator declares a peak event that activates a premium rate – typically ahead of when demand is expected to spike so that people can proactively reduce their consumption for a limited time period. The fact that this pricing is event-driven is lacking. Critical Event Pricing - as in, "Critical Event Prices are in effect" – seems more appropriate.
- Peak Time Rebates. This is used to describe refunds for cutting consumption during peak events. This phrase breaks a fundamental maxim of consumer marketing – never leave out the call-to-action of what people need to do to get a special offer. Examples include “buy now,” “hurry up, limited time special offer,” “call by midnight tonight” and so forth. Amazingly, the fact that people need to cut consumption to be rewarded is missing. There is also some irony in the term since, literally, it means that consumers get a rebate whenever a peak time occurs – for doing approximately nothing. We submit that Peak Use Reduction Refund is a more accurate description of both what people need to do, and what they receive in return.
- Demand Response (DR). Historically, this refers to contractual peak-shaving programs, primarily in the commercial and industrial world, and secondarily, to direct load control of major household appliances. Businesses that sign up for DR get a monthly retainer fee, but they must deliver power consumption reductions when called upon, or when they bid into capacity markets. We view automation as the only surefire way to deliver residential demand reductions with certainty. We believe the term Automated Peak Use Reduction is better for the residential world.
It’s ironic that an industry that spends so much time developing standards, dealing with regulators and working through the details of massive infrastructure rollouts spends so little time thinking about how to communicate with their most important asset: customers (with the exception of a few leading utilities that have appointed a customer czar). Using plain language that makes smart grid benefits tangible is a great place to start. If industry leaders start to do this, they may find that “ratepayers” are more friendly and open to change after all.
This is an excerpt from GTM Research’s upcoming report on home energy management systems, Smart Grid HAN Strategy Report 2011: Technologies, Market Forecast and Leading Players. For more on the report, go here.