Smart Grid Dynamics: What do we know about dynamic pricing? Stephen P. Holland - University of North Carolina at Greensboro and NBER 1

The inefficiency of “flat” electricity rates Without dynamic pricing, electricity consumption is  too large during peak periods  too small during off-peak periods Without smart meters, dynamic pricing is impossible Questions about dynamic pricing:  What are the benefits of dynamic pricing?  Will consumers respond?  Can dynamic pricing be equitable?  Can retail competition help? 2

What are benefits of dynamic pricing? Short-run benefits?  Holland & Mansur (2006) calculate short-run benefits of RTP adoption in PJM of ~1% of energy bill  Benefit from reducing peak consumption and increasing off-peak consumption Long-run benefits?  Borenstein & Holland (2005) calculated long-run benefits of RTP adoption of 5-10% of energy bill  Benefit (primarily) from avoiding peaker construction Environmental benefits?  Holland & Mansur (2006) calculate increase in SO 2 & NO x, but decrease in CO 2 from RTP adoption in PJM  Holland & Mansur (2008) estimate effects of decreased load variance and find different environmental effects in different regions 3

Will consumers respond? Evidence suggests yes!  Allcott 2010 (randomized residential RTP experiment) Peak reductions without shift to off peak Additional reductions from “Pricelight”  Wolak 2006 (randomized residential CPP experiment) 12% reduction on average in CPP days Open questions:  Who responds? (rich? poor?)  What helps them respond? (Pricelight? Google PowerMeter?) 4

Can dynamic pricing be equitable? Adoption of dynamic pricing  eliminates existing cross-subsidy to “peaky” users  exposes customers to increased bill risk Borenstein (2005, 2006, 2011) shows that wealth transfers can be large, and some bills might increase  Dynamic pricing must be voluntary  Voluntary RTP adoption leads to “virtuous” selection Bill risk is not an issue for industrial customers, and can be mitigated for residential customers  “Snap Credit” (Borenstein 2011) keeps salience of high prices, but helps credit constrained customers. 5

Can retail competition help? Monthly variation in prices  Holland & Mansur (2006) showed that 30% of the gains of RTP captured by monthly-varying rates  Most flat rates don’t vary by month(!)  Texas retail competition has indexed (or variable) rates Can flat rates be second best?  Borenstein & Holland (2005) showed that competitive flat rates not even second best  Joskow & Tirole (2006) showed competitive fixed fee plus flat rate is second best  Texas retail competition has some fixed fees plus flat rate Can retail competition avoid distributional concerns?  Texas is installing smart meters. ??? 6