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Energy Markets April,
2003
by Ed Finamore, Valutech Solutions
Is PGE the beginning or end to serious
discussion of time-of-use rates..
While the echoes of Puget Sound Energy's recent
decision to scrap its residential time-of-use rate continue to reverberate
throughout the utility industry, a wave of analysts and pundits
has emerged with a mission to determine what went wrong with their
program and then to forecast an end to time-of-use rate making as
an effective demand response strategy. Let's save them all that
time: because nothing could be further from the truth.
For those willing to step back and objectively examine
the Puget Sound Energy situation, what they may actually be seeing
is the end of an era of pseudo-intellectual romance with time-of-use
rates during a period when the benefits of peak load shifting were
not appreciated by the utility industry, the administrative cost
of maintaining these rates was not fully considered and the actual
cost of installing advanced metering equipment was the accepted
responsibility of no one. But as all regular readers of this space
know, metering does matter...
Many feel good solutions arising during industry deregulation
have thus far avoided the ugly issue of who pays for the advanced
metering and other costs necessary to implement load shifting, curtailment
and other global demand response strategies. In Puget Sound Energy's
case, they claim they apparently underestimated, or initially discounted,
the administrative costs associated with their time-of-use program.
With energy costs stabilizing, and upon failing to obtain adequate
rate relief, they attempted to recapture these costs from the perceived
beneficiaries of the rate. And the rest, as they say, is history.
During the period leading up to the PGE decision,
interest among utilities in time-of-use pricing was considered mixed
at best. Chartwell's 2002 utility survey revealed that approximately
31% of the utilities surveyed expressed at least some interest in
time-of-use rates. However, with the nation's changing regulatory
landscape and temporary easing of energy shortages, some feel that
momentum has been shifting away from implementation of these kinds
of programs. This short sighted view could lead to unfortunate delays
in the implementation of the advanced metering systems that are
needed to manage these rates, which could produce serious consequences
if energy supplies again begin to tighten.
Utilities must realize that the cost to offer these
rates should be weighed against the full range of benefits derived
through their implementation; if not through improved system load
factor or marginal profit, then as a vehicle for hedging the risk
associated with the unpredictable cost of building additional generation
or making unplanned off system energy purchases. Utilities must
be willing to assign fair market value to load shifting programs
in accordance with realistic risk management formulas used to calculate
required future capacity margins and the projected cost of alternative
energy sources that affect the supply side of the ledger. Steve
Brown of Utility Automation recently outlined the relative "benefits"
of PGE's on/off peak pricing differential, which did not appear
to provide a sufficient incentive, as compared to other utilities'
rates, for customers to continue to remain in the program. Not surprisingly,
customers faced with higher costs rebelled when their load shifting
efforts were not being sufficiently appreciated.
If time-of-use and other load management strategies
were given sufficient consideration along with supply alternatives,
then their real value would be reflected in the rates' variable
pricing structures, and customers may then be willing to alter behavior
and usage patterns to achieve meaningful energy cost savings. Patti
Harper-Slaboszewicz, Sr. Energy Analyst with Frost & Sullivan
concurs: "Unless utilities assign fair value for time-of-use
pricing that actually rewards a customer's willingness to modify
behavior patterns to achieve energy cost savings, time-of-use rates
are destined for failure. The other key factor is for utilities
to provide the equipment to automate the customer response as much
as possible, for both large and small customers. And the energy
industry cannot afford to wait until the supply picture again tightens
to do the basic customer research necessary for effective design
of these types of rates."
The State of California is proposing in its recent
Working Group 3 Report (WG3) to conduct additional market research
into the costs and benefits of time-of-use rates. If this and similar
types of research are carried out, much more could be learned about
the relative elasticities of energy demand and retail customer load
shifting preferences to support development of effective time-of-use
rates. Utilities could then begin to properly weigh the benefits
of implementing load shifting programs, and may yet find that their
value proposition will support installation of time-of-use metering.
For time-of-use rates to be effective, they must provide
a real incentive to alter the customer behavior that drives energy
consumption patterns. This can be achieved if utilities are willing
to implement meaningful incentive based time-of-use rates and forgo
some current revenue in advance of the day when they will need these
programs to offset other less desirable alternatives.
Ed Finamore is founder and president of ValuTech
Solutions, a management consulting firm specializing in utility
automation systems and applications, including demand response and
AMR. He can be reached at (412) 299-5684.
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