Killing Two Birds with One Stone: Can Real-Time Pricing Support Retail Competition and Demand Response?

Killing Two Birds with One Stone: Can Real-Time Pricing Support Retail Competition and Demand Response? Galen Barbose, Ranjit Bharvirkar, Charles Goldman, and Nicole Hopper, Lawrence Berkeley National Laboratory Bernie Neenan, Neenan Associates ABSTRACT As retail choice states reach the end of their transitional, rate-cap periods, state regulators must decide what type of default supply service to provide to customers that have not switched to a competitive retail supplier. In a growing number of states, regulators have adopted real-time pricing (RTP) as the default service for large commercial and industrial (C&I) customers. Although this trend is driven chiefly by policy objectives related to retail competition, default service RTP may have the added benefit of stimulating demand response. To evaluate the potential role of RTP as a means to both ends – retail market development and demand response – we conducted a comprehensive review of experience with default RTP in the U.S. and examined the emergence of RTP as a product offering by competitive retail suppliers. Across the ten utilities with default RTP in place in 2005, between 5% and 35% of the applicable load remained on the rate. Based on interviews with competitive retailers, we find evidence to suggest that a comparable amount of load in these states has switched to hourly pricing arrangements with competitive retailers. Many customers on default or competitive hourly pricing are paying prices indexed to the real-time spot market, and thus have no advance knowledge of prices. Because the price responsiveness of customers under these conditions has yet to be formally analyzed, and relatively few efforts have been undertaken to help these customers become price responsive, the actual demand response impacts from hourly pricing in retail choice states remains largely an open question. However, we find that policymakers and other stakeholders in retail choice states have various strategies at their disposal to capture the potential demand response benefits from hourly pricing, while simultaneously supporting retail competition. Introduction Real-time pricing (RTP) has a long and varied history in the U.S. 1 Over the past two decades, more than 70 vertically-integrated utilities in traditional, regulated markets have offered RTP as an optional alternative to their standard rates, on either a pilot or permanent basis. In terms of the demand response impacts, experience with optional RTP in regulated markets has been somewhat mixed. Although various studies have conclusively shown that many participating customers do reduce their load in response to high hourly prices – some significantly so – only a small fraction of optional RTP programs have attracted a sufficient number of participants for the associated load response to have any meaningful impact on system operations or planning (Barbose, Goldman & Neenan 2004). Real-time pricing is a type of retail electricity rate whereby consumers are charged prices that vary over short time intervals, typically hourly, and are notified of these prices no more than several days in advance.