Peak Time Rebates: A Practical Alternative to Critical Peak Pricing?

1. Peak Time Rebates:A Practical Alternative to Critical Peak Pricing? Stephen S. George, Ph.D. Principal Consultant U.S. Demand Response Coordinating Committee Webinar December 15, 2006

2. Dynamic pricing is increasingly being seen as an integral part of any DR portfolio • Various pricing experiments, pilots and programs show • Customers can understand dynamic tariffs such as Critical Peak Pricing (CPP) and even real time pricing (RTP) • Customers do respond, on average, to strong price signals • A large number of consumers prefer these rates once they experience them • Utility investment in the advanced metering systems required for dynamic pricing is growing rapidly • Technology costs have fallen significantly in the last five years • There is growing acknowledgment of the operational benefits and savings of such systems that can help offset the investment costs • EPAct 05 and various state proceedings require utilities to examine both dynamic pricing and advanced metering

3. But there are many political & practical challenges to wide-scale implementation of dynamic pricing • Participation in voluntary TOU and CPP programs is typically very low and such programs can attract free riders • Even when people agree that default, time-varying pricing may be a desirable end-state, the fact that there will be winners and losers when transitioning from current pricing can make change politically difficult if not impossible • Price freezes can impose significant barriers • There are many misperceptions about the actions that people would be “forced” to take when the “stick” of high critical peak prices kicks in and the “carrot” of lower off-peak prices is a distant memory

4. These challenges raise the question of whether there are alternatives to dynamic pricing that may achieve similar results with fewer barriers • Paying customers an incentive to reduce demand during peak periods on critical days is one such option • Anaheim Public Utility District tested a peak time rebate (PTR) in a 2004 pilot program • Customers were paid a rebate of 35 ¢/kWh for each kWh difference in usage during the peak period (noon to 6 pm) on critical days relative to a baseline estimate representing what they would have used • With a base price of 9.7 ¢/kWh, the total incentive was 44.7 ¢/kWh • If energy use was below the baseline, the customer received an incentive payment • If energy use was above the baseline, the customer’s bill was the same as it would have been in the absence of the rebate • The average reduction in peak period energy use was 11.9%

5. SDG&E has proposed a Peak Time Rebate (PTR) tariff for all mass-market consumers • A “carrot-only” pricing strategy that would pay customers to reduce peak-period energy use on critical days • Customers would be paid 65 ¢/kWh for each kWh difference between usage on a critical day and a reference value • Customers would also avoid the average price of 15 ¢/kWh for each kWh not used, so the total financial savings is 80 ¢/kWh • No proactive steps would be required to “participate” in or sign up for this tariff • Customers would be notified of the opportunity to save money on critical days through mass media and other communication channels • This approach avoids California’s AB1X barrier (a partial price freeze) as well as the risk aversion that customers have when considering the carrot and stick nature of CPP tariffs

6. So what’s the catch? • Do people respond as much to a carrot-only tariff as they do to a carrot-stick tariff like CPP? • Is it possible to develop a reasonably accurate baseline estimate? • Can consumers game the system (e.g., increase baseline usage rather than, or in addition to, reducing peak period energy use)?

7. Evidence suggests that consumers respond the same to a PTR as to a CPP rate • We compared the estimated impact for the APU pilot to an estimate based on the demand models developed from CA’s Statewide Pricing Pilot (SPP), after adjusting for differences in the APU and SPP air conditioning saturations and climate • The SPP demand models were based on a CPP/TOU rate, thus reflecting the carrot-and-stick incentives inherent in a CPP tariff

8. The average reduction from the PTR and CPP tariffs was remarkably similar

9. There are plenty of poor methods for estimating baseline usage, but some good ones too Using a baseline method that adjusts for same-day usage dramatically improves accuracy

10. There are many more important things to worry about than customer gaming • General utility paranoia about customer gaming combined with “evidence” from analysis of the APU pilot has raised concern about the issue • Honestly folks, customers have more important things on their minds • The “evidence” presented by Professor Wolak of Stanford indicating wide spread gaming makes no sense • Wolak claimed that customers in the APU pilot had an incentive to increase peak-period energy use on non-critical days in order to receive a bigger incentive for reductions on critical days • Given the baseline methodology used by APU, customers would have had to increase usage on every non-critical day of the summer, which would have cost them twice as much in increased energy use than they would have gained in terms of incentive payments • Focus on accuracy and don’t worry about gaming

11. Summary • Market research and experience indicate that customers are reluctant to sign up for CPP tariffs due to risk aversion • Although customers like time-varying rates once they experience them, when considering whether or not to sign up, customers focus more on the down side risk than the upside potential • The political will to place customers on default dynamic rates is lacking • There should be no political concerns with rebate programs as there are no losers, only winners • Assuming there is a reasonably close relationship to the magnitude of the rebate and avoided cost • Rebate options should be much easier to explain and market than other forms of time-varying rates

12. Summary (continued) • Evidence suggests that customers reduce peak-period usage similarly in response to “carrot-only” rebate incentives as they do in response to “carrot-and-stick” tariffs • Although it would be nice to have a true side-by-side comparison on the same population to validate the APU/SPP comparison • Developing a reasonably accurate baseline methodology is difficult but achievable • Same-day adjustment methods are more accurate • Focus on accuracy and don’t worry about gaming • Rebate programs do nothing to eliminate the cross-subsidies inherent in average cost pricing • Customers who use more than the average amount on peak are not paying the true cost of that energy as they would with a CPP tariff • But the perfect is the enemy of the good—until there is the political will to use default critical peak pricing, peak time rebates may be a useful option for reducing peak loads and educating consumers about dynamic price options

13. For more information, contact Dr. Stephen S. George Principal Consultant Freeman, Sullivan & Co. 415 777-0707 StephenGeorge@FSCGroup.com