2 weeks Ago By Ahmad Faruqui
The energy transition is underway throughout the globe, driven by the need to reduce carbon emissions and mitigate climate change, which is known to be inimical to the health of the eight billion residents of Earth. A key element of the energy transition is to motivate households to use energy wisely. This can be facilitated by modernising the pricing of electricity, sometimes called tariffs or rate design.
The most common rate design is a flat volumetric or energy rate expressed as rupees per kWh of electricity (units). Often, it is accompanied by a monthly fixed charge. When the energy charge rises with usage, it is called an inclining block rate (slab).
It is designed to encourage energy conservation and to make electricity affordable to low users, who are often presumed to be low-income households. A few utilities in Europe and in the US also charge customers based on the size of their connection (amps) or demand (kW). During the past three decades, another innovation has occurred in rate design -- prices vary across seasons and across hours of the day.
The simplest is time-of-use (TOU), which charges a higher price during the peak period and a lower price during the off-peak period. In the simplest version, both the prices and the periods are set in advance. In a more advanced version, the price is set dynamically during the peak period when the electric grid encounters a capacity shortage – typically for a hundred hours of the year.
In the most sophisticated version, real-time pricing (RTP), prices vary by hour. Collectively, these rate designs are called time-varying rates (TVR). Well-designed TVRs should reflect the cost of service.
They may contain 2 or 3 pricing periods and may vary across weekdays and weekends and across seasons. They may also vary geographically. One of the key questions that policy makers face is whether to make TVRs optional, or the standard option, or mandatory.
In most cases, they are offered as options, which over time may become the standard. Mandatory TVRs are rare for households. Electricity Tariffs In Pakistan: An Unsolvable Puzzle I compiled the data from more than 60 pilots that had been conducted from 2000 onwards.
They tested more than 400 TVRs. Some of the TVRs were also paired with smart thermostats and other enabling technologies that automated price response Ideally, customers should be given a choice of rates, ranging from a flat rate to a simple TVR to a sophisticated TVR. Additionally, utilities could offer a guaranteed bill, GB, where the customer pays the same bill regardless of usage.
This is akin to subscription plans offered by Netflix. There’s also a variation of a GB where the customer agrees to lower their usage when a system faces a capacity shortage and earns a reward. This plan is GB Plus.
Caption No two customers are alike. Some are price responsive; others are not. Some like to take risks and others don’t.
Social welfare is enhanced by letting each customer pick the plan that best suits their lifestyle. Of course, each rate design should be reflective of grid costs; otherwise, cross-subsidies will be created between customers. Offering choices is the norm in a market economy, whether for restaurants, clothing stores or cars, and it should become the norm for electricity.
Will customers respond to TVRs by changing the time pattern of their energy consumption? To answer this question, utilities in many countries have conducted dozens of pilots. In my research, I compiled the data from more than 60 pilots that had been conducted from 2000 onwards. They tested more than 400 TVRs.
Some of the TVRs were also paired with smart thermostats and other enabling technologies that automated price response. The data was subjected to a meta-analysis using econometrics and the results are contained in a model, Arcturus . Customers respond to TVRs in a fairly consistent pattern across geographies.
From Tigris To Thames: Elif Shafak’s Epic Journey Through Time And Water As shown in the graph, the higher the ratio of peak to off-peak prices, the higher the reduction in peak demand. If the peak price is twice as high, peak demand goes down by nearly 5%. If enabling technologies are added, the response rises to 8%.
If the peak price is five times as high, as it would be with dynamic pricing, peak demand goes down by 13%. If enabling technologies are added, peak demand goes down by 19%. From what I can gather, Pakistan has not conducted a pilot with TVRs, nor has it measured the impact of the simple TOU rates that are currently being offered by several of the utilities.
Both items are worthy of attention. Here are some other lessons from other countries that Pakistan’s policy makers should consider. Peak periods should not be so long that customers lose interest in TOU rates.
If TOU rates are optional, they should provide significant savings opportunities to customers. Peak prices should be at least three times higher than off-peak prices to get a significant reduction in peak demand. If TOU prices are the standard rate, peak prices should be no higher than twice as much as off-peak prices to avoid a backlash.
When implementing the rates, every effort should be made to educate customers in how best to take advantage of the savings opportunities. In the US , where 80% of households have smart meters, some 10% are on TVRs. The Canadian province of Ontario was the first region in North America to offer TOU rates as the standard tariff.
Even though the price differential is low, peak demand has been lowered by 2-3%. Recently, Quebec has begun offering dynamic pricing rates on an optional basis. Peak demand has responded significantly.
The same has been observed in Nova Scotia. Ramadan In A Chaotic World: Time For Healing And More Australia has begun offering dynamic prices to customers with solar panels. In Continental Europe, where choice of provider is the norm, many retailers, especially in Scandinavia, are pricing electricity on an hourly basis.
Norway has quantified the impact of hourly pricing on peak demand. The good news is that Pakistan can draw upon a wealth of experience while modernising electricity tariffs. The time to begin the process of modernising is now.
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