Peak electricity pricing can save you money

Here in California, summer weather is quickly approaching and once again parts of the state are facing potential electricity shortages. This year the biggest concern is in Southern California due primarily to the continued outage at the San Onofre Nuclear Generation Station (SONGS).  If there are shortages, they are likely to occur on the hottest days of the year when air-conditioning demand is at its peak. Research by many economists (including Wolak, Ida/Ito/Tanaka, Jessoe/Rapson, and many others) has shown that a very effective way to cut peak demand is through “critical peak pricing” programs.

These programs go by different names at different utilities, including SmartRate,  SmartCents, Peak Day Pricing, and Summer Advantage Incentive.  They give you a discount on power most hours of most days, but charge a substantial premium for power on the highest demand days of the summer.  Many utilities now have such programs, though they are not always well advertised or promoted. In nearly all cases for residential customers, they are opt-in, so you have to search them out and figure out how to sign up. I wrote a paper[1] last year that reviewed effective and equitable approaches to implementing opt-in critical peak pricing and estimated the potential impacts on different types of residential customers in the service territories of PG&E and Southern California Edison.

If you are a PG&E customer in the Bay Area (or other milder climate where you don’t have A/C or don’t use it much), their SmartRate will almost surely save you money.  At my house in Orinda (east of Berkeley and somewhat warmer in the summer), we signed up for it last year.  We saved about $40 on electricity, about 13% over the 6 months of the program (May through October). We did avoid running laundry or the dishwasher between 2 PM and 7 PM during the 15 critical peak days that were called, but our adjustments were fairly minor.  If you live in the Bay Area and have not signed up, I urge you to at http://www.pge.com/smartrate.  You can’t really lose during the first year, because the PG&E program has “bill protection,” which guarantees that your electricity bill in your first year on the program will be no higher than it would have been under the standard rate.

PG&E’s program isn’t perfect:

–  I’d like to see them do “shadow billing”, showing on every bill (regardless of which tariff the customer is on) how much the customer paid under the tariff they are on and how much they would have paid if they had switched to an alternative tariff.

–  I would also like to see PG&E get more flexibility from the regulator (the California Public Utilities Commission) on how many critical peak days they can call each year.  A fixed (or maximum) number of calls each summer creates perverse incentives for the utility to call critical peaks on days that are not that hot, or to hold back on hot days in case they run into even hotter days later in the summer.

I discuss these and other issues at greater length in my paper on opt-in critical peak pricing.

Saving money is fine, but the real reason I want you to sign up is to get more direct experiences with critical peak pricing that can shape the way utilities and policymakers design such programs.

If you have already signed up for PG&E’s (or any other utility’s) critical peak pricing program, I welcome your comments about the program.  And if you haven’t signed up yet, particularly if you live in the Bay Area, it is time to start saving money and helping to reduce the stress on the grid during peak times.


[1] The final version was published as “Effective and Equitable Adoption of Opt-In Residential Dynamic Electricity Pricing,” Review of Industrial Organization, March 2013, Volume 42, Issue 2, pp. 127-160.

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25 Responses to Peak electricity pricing can save you money

  1. Chris says:

    do you know how this peak pricing program interacts with a customer who has solar net energy metering? I’m already on a TOU pricing rate structure and a net generator on those peak days.

  2. Pingback: Peak electricity pricing can save you money « The Berkeley Blog

  3. Michael A. Green LBNL retired says:

    I find that the incentives for saving energy are interesting. Art Rosenfeld always said that the cheapest energy you will get is energy not used. No using energy at peaks times is a case in point. The thing that is always missing is an easy way to tell a person how much electrical energy you are using at any given time. Having to go to the web, dealing with pass words and other such non-sense doesn’t cut it. In Norway, houses have a watt meter in the kitchen with a red line on it. When consumption goes above the red line, you are being charged more. A Norwegian house wife can understand that. Something similar would tell the consumer a lot. It is funny that large entities like to keep us in the dark, so we can’t make decisions for ourselves. I say that and I am far from being a raging liberal. I like to save money where I can, and I expect the government to do the same with my money. I enjoy reading things that come from this blog.

    • Ken Kraemer says:

      Michael, I agree that the system SCE uses is extremely discouraging. What a great idea to use something simple. Why do you think the California electricity utility companies don’t do something simple like that? Is it because they really do not want us to cut back on usage? Or are they just that stupid?

  4. Bill Henry says:

    Severin, If I’m a customer who reads all the literature and proceedings out there on rates in California, and I found out the CPP rate is designed today and will be adjusted in the future to make sure it’s revenue-neutral, does that not diminish my long term expectation to save money?

    Why should I switch to CPP or similar, if I expect that rates will be adjusted upward in future years to make up revenues the utility lost when I cut my usage during peak hours this year?

    • AzmatM says:

      Bravo Bill. THAT is the fly in the ointment, I think.
      The approach of playing around the edges is wrong. What we need is behavioral change that can only come from understanding why people do things the way they do. I recall in 1974 (I think) that we were talking about energy (natural gas for home heating etc). I stopped off at a neighbor’s apartment to tell her to keep an eye on my unit as I was going to be gone for a few weeks. The blast of heat that hit me (on a mid-December SF bay area cold day, it snowed in Sunnyvale that year) as I stood by the door. She had her thermostat set at 90 so that her usage base would allow her to be comfortable IF-WHEN rationing prices hit. They never did, and I guess she paid for her paranoia.
      A simple solution is to have a cumulative ‘bill view’ for the period. “At this rate your utility bill for the month will be xx dollars. Last month was yy$. Last year was xx$”. The way the utility rate and return structure is set up they cannot lose: lower usage higher rates, higher usage even higher profit. Privatize. Real privatization will do the job. Establish a reasonable baseline, as the phone system. Establish guidelines for ‘renting’ transmission from the ‘previously’ monopoly utility. Setup a CARE-like structure for those who really cannot pay. Then let private generation, transmission, distribution have their way. The incentive to use renewable would be forced by carbon pricing at the generation.

    • Severin Borenstein says:

      Bill, I checked with folks at PG&E and was told that the SmartRate program itself is not intended to be revenue neutral, though of course all rates have to cover costs in aggregate. The effect should be to raise the standard rate slightly, and lower the overall costs of the utility. I describe this in the paper I’ve linked to.

      • Bill Henry says:

        Severin, the rate I was thinking of came from your paper, the hypothetical CPP tariff, where “rebates and surcharges are set so that they would be revenue-neutral if all customers signed up for the program.”

        If not all customers sign up, we get into the “unraveling effect” where CPP winners pick that rate, causing other rates to increase, creating yet more CPP winners. So the trend here will be lower overall cost to the utility, but if revenues are lower still, it needs to come from somewhere.

        This is just another initiative where the difficult-to-solve problems are indeed small when the adoption rate is minimal (like net metering). I want to think about this by jumping ahead and looking at what happens if time varying rates become more successful than you predict, and it’s a lot more than a “slight increase” in rates to keep the utility whole. Such an outcome will just increase incentives to invest in efficiency and self generate in ways that may or may not align with what the utilities and the commission want. Pretty soon we’ll have to start talking about stranded costs. If I didn’t know any better (and I only barely do), I would assume from conversations like this that doing so would be entering uncharted territory in California.

      • Severin Borenstein says:

        Just to be clear for other readers, Bill’s quote from my paper is not my suggestion, but something I’m worried about. In fact, I show that the right way to handle the shortfall is with an increase in the standard rate. But I also show that with plausible rates of adoption, the unraveling doesn’t occur, and in fact the standard rate probably increases by less than a few percent. Basically it would be in the noise for typical electricity consumers.

  5. Ken Kraemer says:

    It would have been nice if you had told us where to sign up for the SCE program. Could you or someone on your staff tell us? Thanks

    • Severin Borenstein says:

      Ken, unfortunately SCE does not have a CPP program they are ready to roll out for residential customers at this time. Hope they will soon.

  6. Takanori Ida says:

    I visited in Berkeley from 2011 to 2012 just after the East Japan earthquake disaster and the following Fukushima crisis as a Fulbright scholar at UCB and LBNL. I there studied smart grid economics and learnt how to manage the dynamic pricing field experiments. I have conducted some experiments in Japan, jointly with Koichiro Ito and Makoto Tanaka, and concluded that varying critical peak pricing had around 20% peak cut effects. Hopefully I will develop the experiments in order to identify how much the ‘shadow billing’ boosts the opt-in migration elsewhere. I would like to share the results once I obtain them. Thank you.

    • Severin Borenstein says:

      Thank you Takanori and I hope you are doing well. Takanori is the co-author of one of the excellent studies I referenced in the post that shows customers do respond to CPP programs.

    • art2science says:

      Yes, please share your results! Are you doing anything with commercial or industrial customers?

  7. Judy says:

    I own an insulation company and not enough people focus on what they can do, besides the kind of solution you propose in this blog. Making sure your windows are energy efficient, making sure that the caulking on the windows is working and that you have enough or proper insulation in your attic and walls can save a homeowner a lot of money. There are energy tax incentives that may or may not be extended past 2013 that you can deduct (do you still have a bad taste in your mouth after writing your checks April 15?) insulation upgrades, as well as other energy efficient equipment (HVAC to name one). I suggest looking into making sure your home is an energy efficient as possible.

  8. Pingback: Peak electricity pricing can save you money | Veille énergie climat

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  11. art2science says:

    Thanks for posting this! I just checked, and San Diego (SDG&E) has such a rate. One source claims 1.2M customers signed up, but this is clearly way too high. SDG&E was probably the first major utility in the US with a real-time price, which covered more than 20 very large customers in the 1970s. (I looked at the results for an econometrics paper in grad school.) But nonetheless they are using a conservative implementation for consumers now – the price is $.75/kwh but only for reductions below “baseline.” I will sign up for it.

    • Severin Borenstein says:

      Hi Roger:

      That program sounds like it is paying for demand reduction (from some baseline) rather than charging higher prices on peak days. They are not equivalent, as I pointed out in my paper last year on opt-in dynamic pricing. See section 8 starting on page 35. (A final version of the paper has since been published in a symposium in Review of Industrial Organization in honor of Alfred Kahn.)

      • art2science says:

        Severin, Yes, SDG&E is paying only for “reductions from a baseline.” That seems to be all they offer. As you say, it’s a third-best approach. Calculating a baseline raises numerous problems, no matter how you do it. The method mentioned in your paper, of using the previous week’s demand as a baseline, seems especially problematic. In Catherine’s home, she would continue to run her dryer at 5pm most days, rather than redoing the family routine to run at 9pm normally. (Or installing a natural gas dryer.) I don’t know how SDG&E will calculate the baseline, but I will sign up and find out.

        Does the PG&E “high price” vary, or is it determined by a tariff and set a year or more in advance? As long as a utility is sending a text message or email to customers, it would be just as easy to add in a few more bytes of information, specifying the day, the hours, and the price.

      • Severin Borenstein says:

        Roger, PG&E critical peak price is set in advance, though the days are called early afternoon of the previous day. The hours, 2pm-7pm, are fixed.

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