Smart grids/smart rates : Why dynamic pricing is good for consumers and shouldn t scare regulators and policymakers

Transcription

1 Smart grids/smart rates : Why dynamic pricing is good for consumers and shouldn t scare regulators and policymakers Bob Lieberman Illinois Commerce Commission April, 2008

2 My lawyer told me to say... My thoughts today are mine alone and do not necessarily reflect the positions of the Illinois Commerce Commission on any of the issues discussed today.

3 A little background... I have been a regulator for three years. I am currently chairman of the Midwest Demand Resources Initiative as well as serving on the Board of Directors of the Organization of MISO States. For ten years before that I created and managed demand and price response and energy efficiency programs for small commercial and residential customers in northeastern Illinois One of the programs that I was responsible for developing was the Chicago residential real time pricing pilot program that the Illinois General Assembly in 2006 legislated be made available to all residential customers across the state

4 The high cost future In Illinois, we are restructured Our distribution companies own no generation Electricity demand continues to grow Reserve margins are shrinking in the organized regional markets (PJM and MISO) where we buy electricity We face billions of dollars in costs for new capacity Natural gas and increasingly coal is priced in a global marketplace Likely carbon constraints in the not to distant future

5 An example of the high cost future: MISO forecast Coal CC CT Wind New Capacity 2027 (MW) 24,650 8,236 4,070 13,090* Base case analysis 1.28% growth demand and energy PV cost $289 billion $48.5 billion capital costs $241 billion production costs *MISO states renewable resource mandates

6 China spurs coal price surge Once huge exporter now drains supply; Repeat of oil s rise? WSJ China is doing for coal what it once did for oil: pushing prices to new highs, adding more pressure to the creaking global economy. China has long been a huge supplier of coal to itself and the rest of the world. But in the first half of last year, it imported more than it exported for the first time, setting off a near doubling of most coal prices around the world. Thermal coal prices at Australia's Newcastle port, an Asian price benchmark, finished at $125 a metric ton Monday, according to the globalcoal international trading platform. That was up 34% since Jan. 25 and up 143% from January On Monday, Central Appalachian coal futures on the New York Mercantile Exchange for delivery in March stood at $78.25 per U.S. ton. That's double its price at the start of 2007 despite weak domestic demand and above average stockpiles due to a mild U.S. winter. China produces a new coal-fired power station every week, and will be the world s biggest emitter of carbon-dioxide by EU Trade Commissioner Peter Mandelson

7 A future of incessant price increases A never ending series of very hard votes raising prices higher and higher Because we have given ourselves no other choices

8 Current rates structures Same price every 8760 hours Maybe a summer adder, maybe not A hedged product Regardless of what the actual price of electricity is customers get charged the same price every hour Insurance against volatility What do we pay for that insurance?

9 Current flat or bundled rate structures Subsidize air conditioning use while making other end uses more expensive Force low income households (smaller housing, less air conditioning penetration) to subsidize higher income households (McMansions, industrial scale HVAC systems Drive up price of natural gas for residential heating and industrial uses

10 Average of hourly prices MISO Illinois May December 2006 $/m wh $70 $60 $50 $40 $30 $41 $31 $47 $62 $59 $53 $43 $62 $39 $39 $37 $39 $38 $41 $63 reference price point $53 $54 Average of hourly prices $44/mwh $29 $35 $38 $35 $20 $10 $0 May- 05 Jun- 05 Jul-05 Aug- 05 Sep- 05 Oct- 05 Nov- 05 Dec- 05 Jan- 06 Feb- 06 Mar- 06 Apr- 06 May- 06 Jun- 06 Jul-06 Aug- 06 Sep- 06 Oct- 06 Nov- 06 Dec- 06

11 Locational Marginal Price MISO (Southern Illinois) Illinois HUB 2006 $200 $180 $160 Maximum Price $450/mwh 50% of hours 50% of hours $140 $120 Actual Distribution of hourly electricity prices 2006 $/MWH $100 $80 Fixed Price Auction Result September 2006 roughly $63/mwh $60 Cost of Insurance Premium $40 $20 Average LMP Price 2006 $45/mwh $ Hours

12 Why do we have flat rate structures? We always have Inertia being the most powerful force in the universe The very best 1920 s metering technology money can buy Customers don t get the information necessary to make informed decisions

13 The shape of electricity prices: PJM Western Hub Post Katrina natural gas price effect 2006 Natural gas prices fall from post Katrina highs LMP2000 LMP2001 LMP2002 LMP2003 LMP2004 LMP2005 LMP % 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Load duration curves for the past six years show the percentage of hours at extremely high prices is relatively small.

14 Where is the value for customers: Market Prices Estimated average bundled price $0.06kwh The Number of Hours in Different Price Bins for the Last Eight Years January 1, 1999 through December 31, 2006 Total Hours = 70,128 Overall Average Price 3.87 is /kwh above $1.00 $ $1.00 $ $0.50 $ $0.20 $ $0.10 $ $0.09 $ $0.08 $ $0.07 $ $ % of these hours occurred in 2005 due to the spike in natural gas markets impacting electricity prices 1,526 1,880 3,240 5,327 Average Hourly Price Year /kwh % of hours are below 10 /kwh Average hourly price is 3.37 /kwh 80.3% of hours below 5 /kwh Average hourly price is 2.71 /kwh $ $0.05 8,071 $ $ ,715 $ $ ,247 below $ , ,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 Number of Hours

15 Average of Hourly Prices vs. Bundled Price est Cents/kWh Avg hourly Bundled

16 Conceptual confusion among regulators We confuse the concept of volatility with the concept of rising prices as if somehow creating rate structures that reduce volatility will reduce price increases In fact, reducing price volatility inevitably raises average prices

17 But where s the value for customers? Its all about managing the risk Goldman Sachs at FERC Technical Conference in May described growing air conditioning peak demand as Toxic Risk If the supplier takes on the risk, customers pay If we can reduce the risk, we can lower the price If we are unprepared to lower the risk, we are unprepared to take lower prices regardless of whether we exist in a restructured or a vertically integrated universe

18 Even small reductions in the rate of growth of demand and energy produce significant and dramatic cost savings A reduction in the rate of growth for both energy and demand from 1.28 % to.78% results in present value savings of: $25 billion $12.2 billion capital costs $12.3 billion production costs A reduction in the rate of growth for both energy and demand from 1.28% to.78% off the carbon tax results I present value savings of: $30 billion $14.7 billion capital costs $15.3 billion production costs Source: MISO ISO Transmission Asset Management

19 Who get s the value of the lowered risk? Let s presume we actually wanted to lower the risk who gets the value? In a flat rate world, where customers don t see prices customers don t know what the value of the risk reduction behavior actually is Another asymmetric information market The load serving entity knows what the value is. The third party aggregator knows what the value is. As a result, some of the value goes to the load serving entity, some of it goes to the intermediary and maybe, just maybe some of it goes to the customer who is being paid to change his/her behavior The more intermediaries between the customer and the prices, the less value to the customer

20 Who get s the value of the lowered risk? In a dynamic pricing world, where customers see prices Solves the asymmetrical information problem Customers know the value of the risk reduction behavior Ensures that customers receive full value for risk reduction caused by their behavior change

21 Brattle Group Analysis: 5% Peak Reduction Worth $31 billion (over a 20 year period, just based on avoided costs) Annual Value of a 5% Reduction in Peak Demand Annual Financial Value (Billions of $) NPV of Avoided Costs = $31 billion Avoided Costs Avoided Energy Cost Avoided Capacity Cost 5.5 Wholesale Price Reduction

22 Can we reduce the rate of growth? Will customers change their consumption behavior in response to price signals What s in it for them?

23 Will customers respond to price signals? A Chicago example /23/2003 6/24/2003 6/25/ kw % Peak Demand Reduction Compared To Previous Day :00 AM 5:00 AM 9:00 AM 1:00 PM 5:00 PM 9:00 PM

24 Participants changed their behavior Demand Reductions Increases with Air Conditioner Cycling (Summer 2004) ESPP 5% 0% 5% 10% 15% 20% Air Conditioner Cycling 25% 1:00 AM 7:00 AM 1:00 PM 7:00 PM

25 Customers respond to price signals Demand on Standard Average Rate kw Demand on hourly pricing :00 AM 7:00 AM 1:00 PM 7:00 PM

26 Nationally, customers respond to price signals 60% 50% 40% 30% 20% 10% 0% Anaheim Ontario- 1 Ontario- 2 Ontario- 1 Ontario- 2 SPP Australia Idaho Ameren- 04 Ameren- 05 SPP- A SPP- C Ameren- 04 Ameren- 05 ADRS- 04 ADRS- 05 Gulf Power-2 CPP PTR CPP with Technology % Reduction in Load

27 Problem: Bills Initially Rise For 50% Of The Dynamic Pricing Customers Distribution of Bill Impacts 20% 15% Electricity Bill Increase (Decrease) 10% 5% 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% -5% -10% Customers with Flatter Consumption Customers with Peakier Consumption -15% Percentile of Customer Base How do we make dynamic pricing attractive for these customers?

28 With Risk Premium Credit, Dynamic Pricing Rates Attractive For 70% Distribution of Bill Impacts 20% 15% Revenue Neutral Risk Adjusted Electricity Bill Increase (Decrease) 10% 5% 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% -5% -10% -15% -20% Customers with Flatter Consumption Percentile of Customer Base Customers with Peakier Consumption

29 With Demand Response, Dynamic Pricing Attractive To Over 95% Distribution of Bill Impacts Electricity Bill Increase (Decrease) 20% Revenue Neutral 15% Risk Adjusted 10% Load Shifting 5% 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% -5% -10% -15% -20% -25% Customers with Flatter Consumption Percentile of Customer Base Customers with Peakier Consumption

30 Sec A(f) The efficiency of electric markets depends both upon the competitiveness of supply and upon the priceresponsiveness of the demand for service (emphasis added). Therefore, to ensure the lowest total cost of service and to enhance the reliability of service, all classes of electricity customers of electric utilities should have access to and be able to voluntarily use realtime pricing and other price response and demand response mechanisms. The lead Senate sponsor said in floor debate that It is critically important that consumers understand the actual cost of electricity generation. The legislation mandates that utilities offer a voluntary real time pricing option to residential customers starting January, The legislation passed the Illinois Senate 53 0 The legislation passed the Illinois House Signed by the Governor on June 6, 2006

31 Things to watch out for Smart grids/dumb rates Not maximizing the value of the technology investment Intermediaries not customers get the value Reduces the value created Increases cost elsewhere Doesn t fairly reward customers Policies that build lots of supply side capacity w/out taking into account demand side response