Dynamic Pricing
Dynamic Pricing
Restructuring & Deregulation
Restructuring & Deregulation
.. Presented By, Presented By, Kashinath Shinde Kashinath Shinde & & Madhura Tuljapurkar. Madhura Tuljapurkar. Collage Of Engineering,Pune Collage Of Engineering,Pune
Introduction
Market restructuring has created seams between wholesale and retail markets , leading
to unusual levels of price volatility and customer dissatisfaction with retail choice. These seams can be partially or completely closed by introducing dynamic pricing.
Dynamic pricingrefers to any tariff that recognizes the inherent uncertainty in supply
costs. It differs from traditional time-of-use pricing , in which prices vary across the day and perhaps seasonally, but where both prices and time periods are fixed and known a priori.
The most complete expression of dynamic pricing is real time pricing (RTP), where
prices vary by hour on a day-ahead or hour-ahead basis, according to market
conditions. However, there are simpler forms of dynamic pricing , in which prices vary only during extreme supply conditions.
These options may capture many of the economic benefits of RTP, and may be suitable for
wide-scale deployment to mass-s market consumers, for whom dynamic pricing options have largely been ignored until quite recently.
Dynamic pricinghas the potential to make significant improvements in economic
Need Of Dynamic Pricing
o The idea of moving from time-invariant electricity prices to “peak -load”
pricing, where prices are more closely tied to variations in the marginal cost of generating electricity, has been around for at least fifty years . The
marginal cost of electricity varies widely over time because
o (a) the demand for electricity varies widely;
o (b) it is uneconomical to store electricity in most applications;
o (c) the optimal mix of generating capacity to balance supply and demand at
all hours given (a) and (b) includes a combination of base load capacity with high construction costs and low marginal operating costs, intermediate
capacity with lower construction costs but higher marginal operating costs, and peaking capacity with the lowest construction costs and the highest marginal operating costs. When demand is low it is cleared with base load capacity with low marginal operating costs and as demand rises generating capacity with higher marginal operating costs are called upon to balance supply and demand. In general, marginal costs are low at night and high
Need Of Dynamic Pricing
If end-use consumers face retail prices that do not reflect these variations
in marginal generation costs, they will consume too much during peak periods and too little during off-peak periods. Distortions in consumption lead to distorted investment in and utilization of generating capacity.
In regions with deregulated wholesale electricity markets, power prices
reflect both differences in marginal costs as well as time-varying differences in firms abilities to push prices above marginal costs by exercising market power. In this context, moving end-use customers to time-varying prices can also reduce firms incentives and ability to exercise market power by increasing the elasticity of their residual demand.
Dynamic Pricing Comes In Many Flavors
Critical peak pricing (CPP)
A dynamic rate that allows a short-term price increase to a
predetermined level (or levels) to reflect real-time system conditions.
In a fixed-period CPP, the time and duration of the price increase are
predetermined, but the days are not predetermined. In a
variable-period CPP, the time, duration and day of the price increase are not
predetermined.
Peak time rebates (PTR)
The Peak-Time Rebates program helps you save money if you
reduce energy use on peak-event days when electricity demand is
high. This no risk program allows you to keep the same rate you
have now but gives you the opportunity to get a rebate for each
kilowatt-hour (kWh) reduction you make at designated times
during the summer.
Dynamic Price Program
Variable peak pricing (VPP)
Standard on-peak and off-peak time-of-day rates are in effect throughout the month. Under the VPP program, the on-peak price for each weekday becomes available the previous day (typically late afternoon) and you get billed for actual consumption during the billing cycle at these prices.
Real time pricing (RTP)
This rate design features prices that vary hourly or sub-hourly all year long, for
some or all of a customer’s load. Customers are notified of the rates on a day -ahead or hour--ahead basis.
• Time-of-Use Pricing (TOU).
This rate design features prices that vary by time period, being higher in peak periods and lower in off-peak period. The simplest rate involves just two
pricing periods, a peak period and an off-peak period. More complex rates also have one or more shoulder periods.
• Extreme Day Pricing (EDP).
This rate design is similar to CPP, except that the higher price is in effect for all 24 hours for a maximum number of critical days, the timing of which is
Examples Of Dynamic Pricing
Dynamic pricing refers to any electricity tariff that recognizes the
inherent uncertainty in supply costs.
One example is a tariff where price levels are established ahead of time but
the timing when these prices are in effect is unknown. An example is the critical peak pricing tariff currently offered by Gulf Power where a price of $0.29/kWh can be charged during the peak-price period for up to one
percent of the total hours in a year, but neither the consumer or the utility know when these high- priced hours will occur until 24 hours prior to their implementation.
Another form of dynamic pricing is where both price levels and timing are
unknown, but the time block periods within a day when high prices change from one level to another are allowed are known. An example is provided by
PPuget Sound Energy’s proposed adjustable rate tariff, where prices vary daily within known time periods for a portion of participating customer’s’
loads.
Still another example of dynamic pricing is real-timepricing, where price
Illustration of Residential CPP Rate 0.0 0.2 0.4 0.6 0.8 1.0 1.2 0 2 4 6 8 10 12 14 16 18 20 22 24 Hour of Day R a t e ( $ / k W h ) Existing All-In CPP on Critical Days CPP on Non-Critical Days
Advantages Of Dynamic Pricing
The idea of providing electric customers with dynamic pricing information as a
way of reducing peak demand, ultimately reduces generating station capacity.
Fixed pricing is still the industry standard for charging customers for electricity
usage, but some industry professionals say a pricing structure that incentivizes less energy use could save the industry money in the long run.
Utility Cost Savings Breakdown Typical CPP Rate Design
Capacity Cost Savings ~ 70%
Transmission Cost Savings ~ 15%
Energy Cost Savings ~ 5%
Distribution Cost Savings ~ 10%
So Why Is There So Little
Dynamic Pricing?
It strikes many people as a radical new idea
As Arthur C. Clarke noted, when confronted with a new
idea
The first reaction is, “It is completely impossible”
