Lecture 10 – Advanced Pricing in the Smart Grid: Temporal Price Discrimination

Question 1

What are the main categories of energy feedback?

Answer 1

• direct (available on demand)
• indirect (data processed by utility and delivered to customer)
• inadvertent (learning by association
• utility-controlled (learning about the customers)
• energy audits (learning about the energy capital of a building)

Question 2

What are the types of impact smart metering has on user behaviour?

Answer 2

• domestic energy services (new tariff options; remote meter readings)
• behavioural changes (consumer feedback; transparency; billing interval)
• micro generation (import/ export generation meter for reward mech.; remote control)
• settlement system (data frequency; remote start/ stop)

Question 3

What does smart metering mean for suppliers?

Answer 3

• Smart meter balancing regulation Smart meters can provide data on a real-time basis
• Thus, suppliers can better estimate demand (both in the short and long term)
• Suppliers can provide energy more efficiently
• Suppliers can offer tariffs to better meet own generation schedules (based on the prevailing market prices)

Question 4

What are the goals of congestion management?

Answer 4

• Be economically efficient so that market participants can accomplish their transactions, while system security and market efficiency are preserved
• Send efficient signals to encourage adequate transmission and generation investment
• Facilitate instruments to hedge against congestion

Question 5

What does it mean to be economically efficient in relation to congestion management?

Answer 5

1. Limit the cost of congestion to exactly the cost of redispatching the congestion
2. Give the incentives to alleviate the congestion to the lowest cost
3. Be able to accommodate bilateral transactions
4. Assign the cost to those who generate the congestion
5. Give stable, predictable and known-in-advance prices

Question 6

What are management options to overcome network congestions?

Answer 6

1. Capacity expansion
2. Capacity upgrades
3. Substitution
4. Rationing (discriminatory or non-discriminatory)
5. Loss or degradation of service
6. Demand management - congestion pricing

Question 7

What are the advanced pricing approaches for electricity?

Answer 7

• Temporal / dynamic pricing
  • price depends on time of consumption
• Locational pricing
  • price depends on location of consumption
• Power pricing
  • price depends on power
• Service Pricing
  • not electricity is priced but the corresponding service (e.g. heating or charging of EV)

Question 8

How do the difference flexibility options differ among one another?

Answer 8

Alternative options for the flexibility enhancement of the energy system comes at different potentials, spatial and temporal availability, and costs

Question 9

What are the types of demand response programs?

Answer 9

• incentive based programs (IBP) —> divided into classical and market based
• price based programs (PBP) —> time of use (TOU); critical peak pricing (CPP); extreme day CPP (ED-CPP); extreme day pricing (EDP); real time pricing (RTP)

Question 10

What are Incentive-Based Programs (IBP)?

Answer 10

Participating customers receive payments (e.g. bill credits or discount rate)

Question 11

What come under classical IBPs?

Answer 11

• Direct Load Control:
  • Utilities can remotely shut down participant equipment (e.g. air conditioners or water heaters)
• Interruptible / Curtailable Programs:
  • Participants are asked to reduce their load to predefined values
  • Upfront payments or rate discount

Question 12

What are market based programs?

Answer 12

Payment based on load reduction during critical conditions

Question 13

What come under market based IBPs?

Answer 13

• Demand bidding
➢ Consumers bid their load reduction in a wholesale market
• Emergency DR
➢ Incentives to reduce load during emergency conditions
• Capacity Market Programs
➢ Participants have to reduce their load after getting a day-ahead notice of
events
• Ancillary services
➢ Customers can bid load curtailment in the spot market as operating reser

Question 14

What are the forces behind demand curve?

Answer 14

• Average income of consumers
• Size of the market
• Price and availability of related goods
• Tastes or preferences
• Special influences (e.g. geography or weather)

Question 15

What are the types of shift in demand?

Answer 15

▪ Movement along curves
− Change in the quantity demanded
− Dependent on price-variation
▪ Shift of curves (shift in demand)
− Change in demand
− Occurs when factors underlying the demand curve shift (e.g. preferences, WTP)

Question 16

How does a demand curve look different for elastic and inelastic demands?

Answer 16

Inelastic demand curve is steeper

Question 17

What are the long-term factors which affect electricity demand?

Answer 17

▪ Demographic/sociological factors ▪ Income
▪ Size of household
▪ Preferences
▪ Increase of efficiency ▪ Demographic/sociological factors ▪ Income
▪ Size of household
▪ Preferences
▪ Increase of efficiency

Question 18

What are the short-term factors which affect electricity demand?

Answer 18

▪ Weather, Special events
▪ Economic activity

Question 19

What are the forces on electricity demand?

Answer 19

• long-term factors
• short term factors
• substitution alternatives

Question 20

What are the different price based programs?

Answer 20

• Time of Use (TOU)
➢ Different electricity prices for different blocks of time (e.g. peak and off-peak) ➢ The aim is to reflect the average cost of electricity during different periods
• Critical Peak Pricing (CPP)
➢ Called during contingencies or high wholesale electricity prices (limited amount of hours or days per year)
• Extreme Day Pricing (EDP)
➢ Similar to CPP, but price is effective for the whole 24h of the extreme day (unknown until the day ahead)
• Extreme Day CPP (ED-CPP)
➢ CPP rates during extreme days for peak and off peak periods
• Real Time Pricing (RTP)
➢ Hourly fluctuating prices which reflect the real cost of electricity in wholesale market

Question 21

What are the different Temporal pricing schemes?

Answer 21

• static prices
• time-of-use prices (TOU)
• Real-time pricing (RTP) (CPP is a variant)

Question 22

Describe static prices?

Answer 22

• No temporal variation
• Electricity is priced at a constant rate per kWh
• Standard metering equipment sufficient

Question 23

Describe Time-of-use prices (TOU)?

Answer 23

• Pre-defined time slots
• Consumption is priced differently in each slot
• Dynamic variants where price levels are adjusted depending on current grid/ market conditions
• Granular and dynamic TOU requires smart metering
• Two-way communication for tariff updates

Question 24

Describe RTP?

Answer 24

• Hourly (or even subhourly) adjusted electricity prices
• Requires smart metering with frequent two-way communication

Question 25

What are the two (very stylized) alternatives to prevent black-outs?

Answer 25

• Holding costly extra capacity to serve peak periods (peak-load capacity)
• Reduce the peak level through pricing

Question 26

What are the types of cross product effects?

Answer 26

Cross product effects can either me substitute or complements

Question 27

What does complements mean?

Answer 27

➢ Demand for good A and B increase
➢ An increase of good A requires an increased use of good B

Question 28

What does substitutes mean?

Answer 28

➢ Demand for good A increases
➢ Demand of good B decreases

Question 29

Why does RTP theoretically yield the most efficient allocation outcome?

Answer 29

Load and generation are very dynamic – prices should be just as flexible
− Real-time price adjustments can replicate these dynamics and translate them into appropriate economic signals
− Prices can be based on load situation or market prices (e.g. EPEX Spot)

Question 30

Why has RTP not widely been applied yet?

Answer 30

− Requires advanced metering infrastructure
− Large customer fears of price spikes

Question 31

Why are customers and utilities somewhat worried about the introduction of real time pricing?

Answer 31

− Customers fear a large increase of average price under RTP regime
− Firms fear RTP regulation may leave them with a revenue shortfall

Question 32

What misconceptions do the fears about RTP stem from?

Answer 32

− Setting the average price and allowing prices to vary are two different things
− The average retail price can be set at any appropriate level (e.g., by a regulator) while still allowing the “live price” to reflect current market situations

Question 33

The straightforward RTP solution has a flaw – both the revenues and the customer bills will be as variable as the spot electricity price. What is a solution to this?

Answer 33

• The solution to this paradox lies in the possibility of financial hedging: the provider can sign a long-term contract to buy some amount of power at a fixed price every hour.
• The retailer can thus stabilize its revenue and use the returns on the hedging investment to stabilize customer payments
− In times of low electricity prices the loss on the hedge will lead to higher prices for customers
− In times of high electricity prices the gains from the hedge will dampen the effect on customer bills
• Depending on the level of hedging the retailer can offer any kind of bill stability to customers and create retail tariff products with different risk characteristics

Question 34

What are the main promises of RTP?

Answer 34

− Lower costs through reduced peak loads
− Reduction of market power in not fully competitive markets
− Reduced likelihood of system shortages and blackouts

Question 35

Who is more likely to profit from RTP?

Answer 35

− Customers with flatter consumption profiles will benefit more than customers with peaky consumption profiles (assuming peaks are correlated)
− Customers that are able to shift loads can realize large cost reductions
− Reliability-sensitive always-up industrial processes can benefit from RTP despite higher peak prices as they disproportionally profit from higher uptimes