SMART METERS, DEMAND RESPONSE AND REAL TIME PRICING: TOO MANY QUESTIONS AND NOT MANY ANSWERS

Barbara R. Alexander Consumer Affairs Consultant 83 Wedgewood Dr. Winthrop, ME 04364 (207) 395-4143 E-mail: barbalex@ctel.net
Disclaimer: This presentation does not reflect the views of ORNL or any other client

ENERGY POLICY ACT OF 2005 AND ENERGY SECURITY ACT OF 2007

Both Acts amend PURPA to establish a federal policy in favor smart meters, smart grid, and access to time-based pricing for all customers upon request PURPA is not a federal mandate, but requires state investigation and consideration of federal standard within 18 mos. Authorizes federal funding for smart meter and smart grid projects, but appropriations of these funds is required 2007 Act endorses decoupling and changing rate structures to reflect efficiency and conservation objectives
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November 17, 2008

THERE IS MORE: 2008 STIMULUS BILL a/ka/ BAILOUT BILL

Section 306 in Title III authorizes accelerated depreciation (10 years instead of 20 years) for smart metering and smart grid systems This significant tax advantage can ONLY be used by installing meters and T&D systems that meet the laws definition of smart (two way communication; hourly readings; supporting demand response)

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METERS AND PRICING RESIDENTIAL ELECTRIC SERVICE

ADVANCED METERS: Includes new digital meters, two-way communications capability; new communications network; meter data management systems; remote disconnect/reconnect switch Costs? Not much public information, but utilities typically seek pre-approval and guaranteed cost recovery with distribution-based surcharge WHY?

Operation of distribution system: reliability; reduce meter reading expenses; manage the grid New Pricing options: real-time pricing to manage customer demand; reduce peak usage

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REAL TIME PRICING: WHAT IS IT?

Dynamic retail pricing varies the price of electricity as wholesale prices fluctuate over the course of the day; rely on spot or day ahead prices Theory: customers can shift usage or reduce usage according to their sensitivity to price Are these pricing options for residential customers the most cost effective way to reduce system peak load and reduce generation supply prices? Is this designed to allow customers to reduce their electricity bill? Or just shift usage to offpeak hours to avoid higher critical peak prices?

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PREVIOUS EXPERIENCE WITH TOU FOR RESIDENTIAL CUSTOMERS

PUGET SOUND ENERGY: Mandatory TOU prices for all residential customers abandoned in 2002 when analysis showed negative cost benefit and higher, not lower, customer bills Customers with most adverse bill impacts: multi-family and mobile homes MAINE: Mandatory TOU prices for high use electricity customers made voluntary with onset of restructuring and widespread customer dissatisfaction in face of higher electricity prices Elderly customers in newly built multi-unit condos and senior and low income housing complexes most adversely affected and without alternative options NEW YORK: Previous efforts to push for Time of Use pricing resulted in state law that prohibits such time-based pricing except as voluntary options. Many utilities offer Time of Use rate options to residential customers using interval meters; little customer interest RESTRUCTURING STATES: Most abandoned mandatory TOU and other rate design structures associated with generation supply management and assumed that the competitive market would provide such products.
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November 17, 2008

SMART METERS AND REAL TIME PRICING

Utilities in many states, some Governors, and state legislatures are endorsing smart meters and smart grid investments PA mandates smart meters for all within 15 years Proponents emphasize customer control and ability to lower bill by using electricity at lower cost hours Proponents emphasize importance of cutting peak usage and reducing price of electricity in long run Environmentalists support as well to reduce need for new future generation, likely to be polluting

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SMART METERS: KEY IMPACTS ON LOW INCOME CUSTOMERS

Costs of new systems run into billions for large utilities and will increase prices for all customers Remote disconnection for nonpaymentno more premise visits to obtain payment, declare medical emergency, or detect unsafe and dangerous conditions for very young, old, or infirm Prepayment metering easily the next step Encourages more reliance on volatile spot market prices based on wholesale markets Can low income customers really shift usage sufficiently to save on overall bill? What about elderly faced with paying 75 cents/kWh for air conditioning on hot summer days?

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FERC REPORT (2006 and 2007) ON DEMAND RESPONSE AND ADVANCED METERING

Still a relatively small penetration of advanced metering, particularly for residential class Statistics heavily influenced by announcements and plans and pending proceedings. Few residential customers on some form of timebased rates or incentive-based load control programs UNDERLYING MESSAGE: WE NEED MORE ADVANCED METERING TO SUPPORT DR PROGRAMS; NO ANALYSIS OF COST EFFECTIVE PROGRAMS TO ACHIEVE DR OUTSIDE OF THE ADVANCED METER APPROACH

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FERC REPORT (CONT)

REGULATORY BARRIERS TO INCREASE DEMAND RESPONSE AND PEAK PRICING PROGRAMS

Disconnect between retail prices and wholesale markets Utility disincentives: DR reduces utility revenues based one salesrate decoupling? Cost recovery and incentives for new technologiespreapproved cost recovery? More research on cost-effectiveness State-level barriers to DR: state laws and policies about exposing customers to real time prices Retail and wholesale market rules that limit DR: hard to link retail actions with wholesale market payments Barriers re role of third parties: providers need long term regulatory assurance or long term contracts Insufficient market transparency and access to data Better coordination of federal-state jurisdiction: retail and wholesale market coordination

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CALIFORNIA DECISION: BILLION DOLLAR SMART METER PROGRAM APPROVED

In July 2006, California PUC approved PG&Es proposal to replace all electric and gas meters with smart meter technology over five years Price tag of $1.7 billion (20-year pay back) Statewide policy to rely on smart meters and DR to reduce peak load HOWEVER, other benefits were major source of benefits in analysis: remote meter reading; remote connection/disconnection; outage management Existing TOU rates will be promoted and remain voluntary for time being State law prohibits mandatory participation in Critical Peak Pricing for residential customers, but new voluntary CPP option will be implemented for certain hours in summer (1 cent/kWh discount) PUC rejected TURNs evidence that investment not cost effective for all customers and that more modest and targeted investment should be approved at this time
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November 17, 2008

CALIFORNIA RESIDENTIAL TOU AND CRITICAL PEAK PRICING PILOTS

The California statewide pilot programs for 2,500 residential customers in 2002-2004 tested a variety of options (with constraints on bill and revenue impacts) and found:

Regular TOU prices did not result in any sustained usage impact even with prices TWO times the off peak price Critical peak pricing reduced usage on Critical Peak days by 1316% with prices FIVE TIMES higher as standard price (13 cents/kWh) or SIX TIMES higher than off-peak price; impacts varied across climate zones Usage reduction significantly improved with installation of smart thermostat (27%) which were provided free of charge Most usage reduction by higher use customers with central air conditioning systems and higher income, but lower usage customers were also able to shift usage at a lower impact NO change in annual energy usage Lower income customers had lowest level of impact on usage reduction and this impact was negligible.

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SUBSEQUENT CALIFORNIA DEVELOPMENTS

During its installation of smart meters and communication system, PG&E decided that they had chosen the wrong communication system PG&E has filed for change in technology at an additional cost of $600 million SCEs smart meter proposal now also approved by PUC San Diego Powers AMI proposal still pending Southern California Gas has a smart meter proposal pending
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November 17, 2008

CALIFORNIA PILOT RESULTS: ANALYSIS BY TURN

The pilot programs did not factor in the costs of the AMI and smart thermostats in analysis of bill impacts! DR response by residential customers is closely aligned with appliance usage, climate, and demographic (income) factors Almost 50% of residential customers have very low price elasticities (less than -0.10); half will make very little usage changes YET all must pay for program; TURN found that 60% of customers who use less than 6,000 kWh annually would have to shift more than half their peak load to see bill savings when costs of AMI taken into account TURN concluded that only a relatively small group of high usage residential customers can realistically shift sufficient peak load to find bill savings. Several consultants have used the California pilot program results to create a model that is used to predict the demand response results of smart metering proposals in other states, measuring residential customer elasticity of demand.

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ILLINOIS HOURLY PRICING PILOTS AND NEW PROGRAMS

Community Energy Cooperative operated an hourly price program with 1,500 residential ComEd customers in 2003-2006 Used day ahead price notifications (e-mail, website, phone) Compared to flat rates in effect at that time, most customers had lower bills Usage reductions occurred during peak price hours (summer) No analysis of new metering or communication system costs (used older technology) Illinois legislation requires utilities to offer real time or hourly pricing to all residential customers ICC approved statewide voluntary hourly pricing programs for residential customers in early 2007 with onset of auction-based default service prices (100,000-200,00 customers) All customers will pay small fee for new programs and participating customers will pay $2.25/month Analysis of costs and benefits will occur by 2008, but very low enrollment in 2007

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WHAT ABOUT SMART GAS METERS?

PG&E and Southern California Edison in California are upgrading or replacing all its gas meters as part of its electric smart meter program Most combined gas-electric utilities can document economies of scale in use of new communication system for both gas and electric meters But what about stand alone gas utility AMI proposals?
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November 17, 2008

Southern California Gas

SoCal Gas applied for a stand alone smart metering program in September 2008 $1.09 billion for 2009-2015 installation Approval sought without hearing on grounds that California policy supports AMI Ratepayer Advocate: filed protest

NPV of benefits only slightly above costs, even accepting utility statements (2% return) No demand response benefits for gas! No real time or critical peak pricing options Gas can be stored; no significant differential between peak and off peak prices Cannot justify stand alone communication system costs for gas metering alone No evidence that gas customers will conserve based on access to real time pricing information of gas Utilities failed to consider other least cost alternatives to achieve its identified benefits

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Duke Energy

Duke Energy in Ohio is a combined gas/electric utility Duke is proposing new gas modules as part of its electric smart grid initiative Combined communication system Existing gas meters not replaced; proposing to add on modules to enable the two-way communication at 1/3 cost of new electric meter

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WHAT IS LIKELY TO HAPPEN WITH SMART METERS

While these time-based pricing options may be proposed initially as voluntary, there is every reason to suggest that mandatory time-based rates will be the next step

November 17, 2008

Ontario: smart meters being installed for every customer and Time of Use rates are now mandatory Pepcos filings in DC, MD, and DE state that benefits will be greatly increased if all customers are required to accept time-based rates or critical peak pricing DC Commission has publicly asked if default service prices should reflect hourly or time-based prices for all customers California Commission exploring mandatory timebased pricing for all customers NASUCA 2008 19

QUESTIONS THAT SHOULD BE CONFRONTED

Has anyone evaluated the impact of the new metering technology or the new volatile pricing systems on low income or low use customers? Any such analysis would show different results in different climates, pricing zones, and customer demographics. It is wrong to use the California data as gospel.

Move to more volatile and real time pricing of essential electric service Impact on lower use customers, particularly the elderly, disabled, very young Impact on payment troubled customers Impact on structure of current low income bill assistance programs: benefit levels and participation rate
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E.g., very few residential customers in Maine have central air conditioning systems

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SMART METERS: IMPLICATIONS FOR RATE DESIGN FOR ALL CUSTOMERS

Commissioner Rick Morgan (D.C. Public Service Commission): There is no point in having smart meters if youre still going to have dumb rates.

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SMART METERS AND REAL TIME PRICING PROMOTED AS NEXT STAGE OF RESTRUCTURING

We can get rid of every bit of that [wholesale power price caps, regional capacity market auctions] tomorrow, if every state will allow the full floating price every five minutes to be reflected in the customers bill.

Philip G. Harris, President of PJM Interconnection, interview in Public Utilities Fortnightly, October 2006, page 41.

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HOW CAN T&D SHOW DEMAND RESPONSE BENEFITS IN RESTRUCTURING STATES?

Pepco in District of Columbia (also in MD, DE) recently filed a proposal to install advanced meters with two-way communication throughout its system at a cost of $60 M; analysis of costs and benefits shows that only half of costs recovered through operational savings; relies on demand response programs (for which Pepco is not responsible) to estimate benefits Central Maine Power Co. in Maine recently filed for system-wide advanced metering with a 15-year NPV analysis showing a $108 M increase in revenue requirement with half recovered in net operating benefits, which requires that there is no net overall benefit to customers without heavy emphasis on demand response/real time pricing programs. Note: CMP has moved to withdraw its proposal, due in part to changing technologies AND lack of supplier interest in offering these pricing programs as part of Standard Offer Service to residential customers.

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QUESTIONS THAT SHOULD BE CONFRONTED

While utilities are great at figuring out the costs and seeking automatic cost recovery, questions remain about the estimated operational benefits claimed from these new systems

No operational data from full scale deployment How to track benefits and assure that customers see benefits in the form of lower rates What percentage of the proposed system relies on demand response benefits to achieve the cost effective allegation? 10% 40% How can these benefits be assured in lower generation supply prices for states in which the utility does not own generation and purchases energy from the wholesale market?

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QUESTIONS THAT SHOULD BE CONFRONTED

Most new metering and communications technology allow disconnection or reconnection without premise visit with significant implications for customer contact and premise visit requirements in many state rules

Elimination of attempt at personal contact Concerned about inability to detect medical conditions; avoid disconnection at the door

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KEY POLICY ISSUE: LINK TO DEFAULT SERVICE POLICIES

If we are trying to implement long term portfolio management for default service and avoid short-term volatility, how can we justify the use of expensive advanced metering and hourly pricing programs that are designed to offer very volatile wholesale market spot prices? ARE REGULATORS WILLING TO CHARGE 60 CENTS/KwH FOR ESSENTIAL ELECTRICITY SERVICE? Isnt this metering technology another long term contract for DR resources? If so, how can distribution utilities enter into such contracts without analysis of all cost effective options as part of Default Service portfolio? Are the meter costs and DR programs the most cost effective way to lower electricity generation supply costs over the long term? Arent we relying on immature and sometimes dysfunctional wholesale markets to price essential electricity service for residential customers? THE RELIANCE ON WHOLESALE SPOT MARKET PRICES RESULTS IN A FEDERALIZATION OF ELECTRICITY PRICES.
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November 17, 2008

WHAT IS THE POINT?

If the intent to to assure long term lowest price for essential electricity service, we need to evaluate ALL the options for the energy supply portfolio: EE, DR, generation supply contracts of various terms, utility selfbuild, bilateral as well as wholesale market contracts Peak load reduction is part of the portfolio What is the long term cheapest or most cost effective way to achieve our objectives for the residential class? Viewed from this perspective, is a system wide smart meter program the best approach? This is a long term contract and should be evaluated as such, but utilities refuse such analysis Shouldnt we compare EE and DR options to get residential contribution to peak load reduction or reduction generally? What is wrong with Direct Load Control?

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DIRECT LOAD CONTROL MAY BE MORE COST EFFECTIVE

BG&E in Maryland has been approved to expand an older Direct Load Control program for residential customers with bill credits in return for cycling central air systems or heat pumps during critical peak hours in summer BGE projects that average bill reduction for ALL residential customers will exceed costs within 2-3 years due to reduced costs associated with peak load purchases Seeks to bid this program into PJM Capacity Market in 2008 and return savings to all retail customers

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ARE THERE OPTIONS TO SYSTEM WIDE SMART METERS?

CRITERIA FOR ACCEPTABLE DEMAND RESPONSE PROGRAMS

Voluntary Aimed at customers with options to shift usage: high usage residential customers (central A/C); commercial and industrial Rewards not penalties Focus on Incentive Programs targeted to specific appliance interruptions (air conditioning) for short time periods and customer credits Require modest investment in new communication and metering systems Emphasize energy efficiency programs Support new building standards; mandatory appliance efficiency standards

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WHAT IS LEAST COST SOLUTION?

Least cost solution to higher electricity prices is robust portfolio of cost effective energy efficiency programsreduce consumption Dynamic pricing alone is not likely to result in reduced overall usage or allow customers to see lower annual bills [See recent article by Ahmad Faruqui of Brattle Group, key proponent of AMI, in August 2008 Public Utility Fortnightly] Focus demand response on higher use customers Long run? Building design; appliance standards; programmable thermostats Enough of paying utilities incentives and rewards to encourage folks to go buy a $2 CFL at Home Depot!

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WHAT CONSUMERS FEAR

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