demand response in california’s electricity future
DESCRIPTION
Demand Response in California’s Electricity Future. by Severin Borenstein, Professor, Haas School of Business Director, UC Energy Institute (www.ucei.org). A Brief History of Electricity Pricing. In the beginning, there was no metering Then begat aggregate consumption meters - PowerPoint PPT PresentationTRANSCRIPT
Demand Response in California’s Electricity Futureby
Severin Borenstein,
Professor, Haas School of Business
Director, UC Energy Institute (www.ucei.org)
A Brief History of Electricity Pricing In the beginning, there was no metering Then <someone> begat aggregate consumption
meters Businesspeople and economists said it was better
But utilities still had to plan for highest plausible demand
Unlike nearly most other industries, price didn’t adjust to reflect demand changes Technology to do so didn’t exist or was too expensive “buyers wouldn’t respond to prices anyway”
“System Operator’s 1st, 2nd, and 3rd, priority is reliability” Avoiding blackouts was/is job #1 But, maybe in a pinch demand could help out Thus begat “interruptible service”
Lower rate, but first to black out if system is short Promise not to black out very often Actually, mainly an industrial customer discount “Interruptions” were actually just high prices
Interruptible service minimizes phone calls, but is the most costly way to ration demand Not all power usage has the same value Not all power usage is “critical to our lives”
Time-Varying Prices for Electricity Time-of-Use Pricing
Peak/Off-peak, but highest costs are in few hours TOU with Demand Charges
Old technology attempt to capture highest peaks Critical Peak Pricing
New technology attempt to capture highest peaks Paying for Demand Reduction
The “nice guy” approach, but with many headaches Realtime Pricing
The gold standard
The Value of Time-Varying Retail Prices
Efficient pricing in the short-run gives efficient incentives to consume and efficient load shifting among periods
Efficient pricing gives optimal long-run incentives to invest in capacity
More immediate demand response reduces generator incentive to exercise market power in wholesale market
Reduces need for reserve capacity Bottom Line: Lower Long-Run Costs, Higher
Consumer Benefits, CSEM WP#116
Methods for Implementing Time-Varying Retail Pricing
Key differences among plans Granularity of retail prices Timeliness of retail price setting - “dynamic” Adaptability to varying revenue target Bill Volatility – protection against price spikes
Granularity and Timeliness are different, but interact in important ways
Adaptability need not conflict with protection against volatile bills
Flat-Rate Service Revisited
poor granularity, no time variation prices are not timely, change annually (?) very adaptable -- change rate to hit revenue
target, but prices are very inefficient protection against volatile bills
Wholesale price spikes smoothed over long periods
Real-Time Retail Pricing (RTP)
Excellent Granularity Prices usually change hourly
Very Good to Excellent Timeliness Using “day-ahead” or “real-time” price
Arguments against RTP bills will be volatile not adaptable to meet revenue requirements
BUT straightforward alterations to RTP overcome these objections
Issues in Implementing RTP Customer Price/Bill Risk on RTP Meeting Retailer/Utility Revenue
Requirements Mandatory versus Voluntary RTP RTP and Reserve Requirements
Mitigating Customer Risk Under RTP Customer risk comes from the possibility of
unexpected high wholesale prices Hedge through long-term contracts
Active Hedging by Customers or Hedging by Retailer on Behalf of Customer
How to pass along gain/loss from hedge while minimizing distortion of retail price?
Mitigating Customer Risk Under RTP Retailer Hedges for Customers
Still charges RTP on the margin Passes through gains/losses from hedge with
minimum distortion of retail price Customer Baseline Load (CBL) approach Constant adder/subtractor to retail RTP
Active Hedging by Customers “BYO Baseline” offered by retailer Hedging instruments from energy sector
Meeting Retailer/Utility RevenueRequirements Under RTP
RTP revenues won’t match retailer’s costs if some power bought under long-term
contract if some power generated by retailer if retailer has fixed costs unrelated to energy
e.g., distribution costs
if retailer has sunk/stranded costs
Meeting Retailer/Utility RevenueRequirements Under RTP Collect differential as lump-sum, so marginal
price is still RTP CBL approach does this Politics of setting lump-sum levels/baselines
Collect differential as constant per kilowatt-hour adder or subtractor still have variability in RTP
small inefficiency of consumption
Example: Passthrough of Fixed Hedging Gains with Constant “Subtractor”
Real-time Pricing with Monthly Bill Stability(Assumes contract at 6 cents/kWh. Prices include 4 cents/kWh T&D)
¢0
¢10
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Day of June 2000
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ith
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PX (hourly price)
PX Month Avg (18.08cents)
100% Contract (10 cents)
20% PX Month Avg + 80%Contract (11.62 cents)
PX Adjusted for Contract (PX-6.46 cents)
Mandatory versus Voluntary RTP If RTP is so great, why do we have to make it
mandatory? We don’t. But don’t cross-subsidize flat rate customers
The vicious cycle of equalizing average price between RTP and non-RTP customers some RTP customers will always be paying more
than they would on flat rate so will switch to flat eventually RTP collapses
Voluntary RTP Without Cross-Subsidy The virtuous cycle of allowing each group to
stand on its own -- no cross-subsidy lowest-cost customers on flat-rate better off
switching to RTP mimics a competitive market outcome lower prices for those who are cheaper to serve
if that’s “cherry picking,” I’m for it all customers still pay for fixed/sunk costs,
not a method for dodging sunk cost liability
The Role of Demand Response in Resource Adequacy and Reserves RTP will not eliminate the need for reserves
so long as price-responsive demand is slower than callable supply
But RTP offers more than peak demand reduction demand “tilts” as well as shifts
RTP will gradually reduce use of reserves as system operators recognize its reliability
Eventually, RTP will reduce the standard for percentage reserves
Demand Response and Renewables Demand response flattens load, reducing
peaks and raising off-peaks Reduces use of peaker gas power Helps wind and solar power Can make baseload coal more attractive
Demand response is not Energy Efficiency Both will play a critical role in CA energy future
How Price-Responsive is Demand? Evidence from California 2001 and other
conservation programs Evidence from RTP programs and pilots Evidence from dynamic pricing programs and
pilots These estimates almost certainly understate
price responsiveness as technology improves The next programmable thermostat
Where is Demand Response in now? Nowhere in California (worse than pre-2000),
but working groups and pilot projects to restart it – CPUC/CEC joint initiative
Still great resistance to RTP. Most initiatives are Critical Peak or paying for demand reduction
Open question of resource adequacy for a “non-core” group and role of demand response
Conclusions Static pricing of electricity is based on old metering
technology, has large inefficiency RTP is the gold standard of electricity pricing Resistance to RTP is understandable, but not
difficult to address Real barrier to RTP is metering cost, but only for
small customers (and maybe not even them) starting with large customers probably gets biggest bang
for buck Demand response will play significant role in
resource adequacy and future CA electricity industry