Provocateur:
Dr. Ronald Sutherland, CAEM Senior Scholar

All power is not created equal. Its value is determined by timing, fuel choice, location, transmission availability, supply and demand. If there were different price tiers based on those factors, what would the demand response be, and how would the supply/demand/pricing equation differ? Price demand response means that retail prices to customers fluctuate according to actual marginal costs, and the amount of electricity demanded then responds to market prices. At present, most utilities have flat rate pricing—meaning constant prices rather than fluctuating real time prices.

A crucial aspect of competition is producing efficient real-time prices in the wholesale market, and revealing those prices in the retail market. Consumers respond, in part, by reducing peak use, but a new risk reduction business will develop where markets design efficient price risk reduction measures and sell them to consumers, so that consumers would pay stable prices.

This session will:

• Define the Issues
• Provide a definition of price-demand response; i.e., electricity price equals marginal cost.
• Distinguish between time-of-use (TOU), real time pricing, and critical peak pricing (CCP)
• Discuss the potential efficiency gains to retail customers.
• Discuss the potential efficiency gains to wholesale market
• Discuss the importance of the transaction cost of implementing real-time pricing measures. For instance, transaction cost includes purchasing and installing required metering equipment, plus negotiating a deal with customers to accept real-time pricing, and other costs. What are the metering issues? Who pays for meters? How much would real-time metering cost?
• Discuss if real-time pricing really makes sense. How high are marginal costs relative to average costs by season and by time of day? Should marginal cost be considered as both long run (to include capital costs) and short run (to include only operating costs)?
• What are the main impediments in implementing a real-time price-response demand mechanism?
• How should efficient pricing be applied to the market for total capacity?
  • Is real-time retail pricing sufficient?
  • Should the power pool buy options to reduce demand at critical periods?
    

Ron Sutherland, working with an active group representing over 20 organizations and top energy economists, was the principal author of the CAEM-sponsored study, Estimating the Benefits From Restructuring Electricity Markets: An Application to the PJM Region. Sutherland, a PhD economist and CAEM Senior Scholar, has more than 20 years experience analyzing energy issues. He focuses on electricity and natural gas regulatory and restructuring issues. Sutherland is an independent consulting economist and Adjunct Professor of Law at the George Mason University, School of Law. Much of his career was spent with two DOE national laboratories: Los Alamos National Laboratory and Argonne National Laboratory, where he assessed several regulatory and energy issues. He is a former senior economist for the American Petroleum Institute and economics professor with the University of Illinois