Retail Real-Time Pricing for Mass Market Customers: Experience, Perspectives, And Implications For A Post-2006 Policy Framework Bob Lieberman, Center for Neighborhood Technology Kathryn Tholin, Community Energy Cooperative Illinois Commerce Commission Electric Policy Committee August 3, 2004

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL Presentation Outline The logic of Retail Real-Time Pricing (RRTP) for mass market customers Overview of Energy-Smart Pricing Plan Results from first year of program Perspectives on real-time pricing for mass market consumers Integrating demand and price response for all customers into a post-2006 policy framework

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL Searching For Market-based Benefits For Mass Market Customers Since 1999, ComEd and the Center for Neighborhood Technology have been engaged in a collaborative effort to identify innovative opportunities for mass market customers in a post-2006 era The most promising opportunity we have identified is known in the trade as “Retail Real-Time Pricing”

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL What Is Retail Real-Time Pricing? Working definition: –A retail pricing strategy where commodity prices vary on an hourly basis to reflect the changing supply/demand balance in the wholesale markets Attributes –Customers are charged hourly market prices, reflecting not only how much electricity is consumed, but when it is consumed –Customers get information about price levels and changes, and are able to change their consumption behavior to reflect changing prices

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL Potential Benefits Of RRTP Reduction of peak demand –Fewer peaker plants/lower natural gas consumption –Less stress on wires and transformers Reduced electricity costs for RRTP participants as they gain access to low-cost off-peak power Reduced electricity costs for everyone –As peak demand is reduced, average price for all electricity is reduced

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL The Conventional Wisdom: Why Retail Real-Time Pricing For Mass Market Customers Won’t Work The market is volatile and full of risk There is no value for mass market consumers The meters are too expensive Mass market consumers won’t respond to price signals, are unable to manage risk and volatility and need to be protected

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL Threshold Questions What is the risk? How volatile is the market? How much does it cost to manage that risk? What is the value? How large is the risk premium? How much do the meters really cost? Will mass market customers respond to price signals?

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL How Volatile Is The Market? Patterns Of Electricity Prices Electricity prices vary by hour, day and season in response to demand driven by weather and other factors 98% of the year wholesale market prices are low because demand is low and supply is abundant Power supplied during these hours is from power plants that are relatively inexpensive to run For several hundred hours per year (during hot summer weather on July and August weekday afternoons, and occasionally on very cold winter days) demand rises, causing prices to “spike.” Generators use natural-gas fueled peaking power plants to meet this spike in demand

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL Market Prices Are Driven By Hourly Demand Monday, August 2 Average Price 5¢/kWh Sunday, August 1 Average Price 3.5¢/kWh 10¢/kWh 2¢/kWh

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL 49,080 Hours Of Market Prices 89.5% of hours are below 5¢/kWh. Average Price is 2.51¢/kWh 98.5% of hours are below 10¢/kWh. Average Price is 2.86¢/kWh

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL When Does The Volatility Occur? Does it occur randomly? Or is there a pattern? Over the past five years, when you look at the 1.5% of the hours when the prices were above $0.10/kWh you consistently find: –Hot, July and August weekday afternoons

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL Electricity Prices Are Low Most of the Time [Historical Prices ]

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL Is There Any Value? What would it be worth for mass market customers to take retail real-time prices? Is it worth the time and trouble?

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL A Rough Estimate Of The Value

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL Total Cost Comparisons and Savings Bundled Costs Market Aggregation Costs Market Aggregation Costs With 10% Decrease in Summer Load % Savings No Load Reduction % Savings With 10% Load Reduction De Kalb$67,990,992$56,289,105$55,310, %18.65% Elgin$203,151,140$160,936,180$156,638, %22.90% Evanston$169,187,649$135,164,481$132,241, %21.84% Kankakee$70,299,672$55,240,974$53,627, %23.72% Park Forest$30,400,743$25,037,783$24,678, %18.82% Woodstock$66,763,044$47,740,109$46,499, %30.35% Aggregate$607,793,241$480,408,632$468,995, %22.84%

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL How Expensive Are The Meters? The meters in the current rate experiment – installed – are in the range of $200 per meter In the Municipal Aggregation study submitted to the General Assembly by the ICC two years ago, ICC staff estimated the cost of interval metering (necessary for retail real-time pricing) at $1.51/month Recent California PUC estimates for critical-peak pricing metering range from $ /month Italian utility Enel is replacing 27 million meters at a cost of approximately $85/meter (2 billion Euros total cost) Advanced metering costs continue to decline

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL The Logic If, in theory, giving mass market customers access to hourly market prices: –Produced potential savings around 20% - 25% a year per household and, –Price volatility was limited to a small and predictable number of hours per year and, –The cost of the metering was only a small percentage of the possible participant savings –The program could be structured so that the distribution utility was indifferent, and –It created market-based incentives for demand reduction and price responsiveness How could it be implemented?

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL Final Question Would mass market customers respond to price signals?

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL Theory And Practice ComEd and the Center for Neighborhood Technology join together in 1999 to test the proposition that—if one looked hard enough—there was possible value in restructuring for residential customers that held the distribution company harmless Started planning for a real-time pricing program in 2001 ICC adopted the tariff in 2002 for a three-year period: Energy-Smart Pricing Plan begins in January, 2003

Community Energy Cooperative The Energy-Smart Pricing Plan

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL What Is ESPP? Residential market-based pricing plan Tools and information for participants to manage their energy use A program to explore opportunities and benefits of market-based prices for: –Individuals –Broader system/non-participants

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL Partner Roles ComEd –Provides rate and metering/billing system Community Energy Cooperative –Provides customer notification, education, energy management tools

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL Rate Background Rate RHEP: distribution charge plus variable energy charge based on wholesale prices Models bundled rate/market rate differential in post-2006 environment Participation only through Community Energy Cooperative

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL Energy Pricing Day-ahead prices – posted after 5pm for the following day Each day ComEd obtains a day-ahead price for the wholesale market ComEd uses that price and the PJM West load shape to generate a set of 24 hourly prices The ICC approved this method as part of Rate HEP in 1999 Cooperative provides limited hedging at $0.50/kwh

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL Program Components Interval recording meters Prices available through web and phone High price alerts via phone, Energy management/price response tools –Information about usage –Instructions and tips on how to reduce usage during peak periods –Ongoing energy efficiency information

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL Web Access to Detailed Energy Use Data

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL Over 1,100 participants today –100 households in control group for first year –40% have window air conditioners, 40% central air conditioning, 20% no air conditioning –56% Chicago, 44% suburban –10% Spanish-speaking households –83% single family –17% multifamily Relevant Participants Characteristics

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL Well, What Happened? August 26, 2003, with the market price above $0.10 per kWh, people in the program changed the way they used energy…. –One woman cooled only the kitchen and cooked outdoors –Another turned off her air conditioner and went to the movies –One man pre-cooled his house and turned off the air conditioner in the late afternoon

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL One Member’s Response: Changing Thermostat Set Point In Response To Price Notification

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL Central Air Conditioner Users Respond To Price Alerts

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL Key Findings 1.Participants responded to peak period prices Aggregate demand reduction was as high as 25% during notification period Over half of all participants showed significant response to high price notifications Vast majority of participants showed some response Over 80% of participants modified their AC use Over 70% of participants reported modifying their clothes-washing patterns

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL Key Findings, Cont. 2.Participants liked the program Found it easy to understand and manage 82% said program was “quick and easy”; 1% said “time consuming and difficult” Participants were happy with the financial results of the program—average savings were more than $12/month or 20% In addition to saving money, participants valued: Bill control Environmental impact Greater understanding of energy use Retention rate of greater than 98% for second year.

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL Key Findings, Cont. 3.Lower income participants were disproportionately represented in the “high responder” group 4.Multifamily households as a group were more responsive to price than single family 5.Households with window air conditioners maintained their price-responsive behavior better across multiple high-priced hours

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL Contrary To Conventional Wisdom The Energy-Smart Pricing Plan shows: –A simple, understandable RRTP program for mass market customers is possible –Mass market consumers can and do respond to price signals

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL Policy Implications Small consumers need a way to participate in the market Demand and price response options for all sectors is important to long-run flexibility of system May be only way to get meaningful ‘choice’ to mass market

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL Policy Implications: Why Market-based Prices? Where there is a functioning wholesale market, it represents actual values of energy in the marketplace System will be objective and transparent: customers can understand and trust its basis Creates value for consumers when they assume price risk Participants get full benefit of off-peak low prices Properly structured, it can provide significant cost savings for consumers without reducing revenues for the distribution utility

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL Policy Implications: Benefits of Demand and Price Response It will reduce peak demand, mitigating market power It will ensure that the long-run electricity prices in Illinois are as low as they can be, both for participants and non-participants It will provide market-based incentives for energy efficiency, distributed generation, alternative energy and new innovative load-shifting technologies

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL Policy Implications, cont. Given what we have all learned since 1997, we need to build extensive demand and price response mechanisms directly and explicitly into the post-2006 design It works for commercial and industrial customers It can be made to work for residential customers It has benefits for participants and the broader system

Community Energy Cooperative at the Center for Neighborhood Technology 2125 West North Avenue, Chicago, IL For Further Information This presentation is available at: – Bob Lieberman Kathryn Tholin