Ontario Pilot by Chris Trayhorn, Publisher of mThink Blue Book, January 1, 2008 Smart metering technologies are making it possible to provide residential utility customers with the sophisticated “smart pricing” options once available only to larger commercial and industrial customers. When integrated with appropriate data manipulation and billing systems, smart metering systems can enable a number of innovative pricing and service regimes that shift or reduce energy consumption. In addition, by giving customers ready access to up-to-date information about their energy demand and usage through a more informative bill, an in-home display monitor or an enhanced website, utilities can supplement smart pricing options and promote further energy conservation. SMART PRICES Examples of smart pricing options include: Time-of-use (TOU) is a tiered system where price varies consistently by day or time of day, typically with two or three price levels. Critical peak pricing (CPP) imposes dramatically higher prices during specific days or hours in the year to reflect the actual or deemed price of electricity at that time. Critical peak rebate (CPR) programs enable customers to receive rebates for using less power during specific periods. Hourly pricing allows energy prices to change on an hourly basis in conformance with market prices. Price adjustments reflect customer participation in load control, distributed generation or other programs. SMART INFORMATION Although time-sensitive pricing is designed primarily to reduce peak demand, these programs also typically result in a small reduction in overall energy consumption. This reduction is caused by factors independent of the primary objective of TOU pricing. These factors include the following: Higher peak pricing causes consumers to eliminate, rather than merely delay, activities or habits that consume energy. Some of the load reductions that higher peak or critical peak prices produce are merely shifted to other time periods. For example, consumers do not stop doing laundry; they simply switch to doing it at non-peak times. In these cases the usage is “recovered.” Other load reductions, such as those resulting from consumers turning off lights or lowering heat, are not recovered, thus reducing the household’s total electricity consumption. Dynamic pricing programs give participants a more detailed awareness of how they use electricity, which in turn results in lower consumption. These programs usually increase the amount of usage information or feedback received by the customer, which also encourages lower consumption. The key challenge for utilities and policy makers comes in deciding which pricing and communications structures will most actively engage their customers and drive the desired conservation behaviors. Studies show that good customer feedback on energy usage can reduce total consumption by 5 to 10 percent. Smart meters let customers readily access more up-to-date information about their hourly, daily and monthly energy usage via in-home displays, websites and even monthly bill inserts. The smart metering program undertaken by the province of Ontario, Canada, presents one approach and serves as a useful example for utility companies contemplating similar deployments. ONTARIO’S PROGRAM In 2004, anticipating a serious energy generation shortfall in coming years, the government of Ontario announced plans to have smart electricity meters installed in 800,000 homes and small businesses by the end of 2007, and throughout Ontario by 2010. The initiative will affect approximately 4.5 million customers. As the regulator of Ontario’s electricity industry, the Ontario Energy Board (OEB) was responsible for designing the smart prices that would go with these smart meters. The plan was to introduce flexible, time-of-use electricity pricing to encourage conservation and peak demand shifting. In June 2006, the OEB commissioned IBM to manage a pilot program that would help determine the best structure for prices and the best ways to communicate these prices. By Aug. 1, 2006, 375 residential customers in the Ottawa area of Ontario had been recruited into a seven-month pilot program. Customers were promised $50 as an incentive for remaining on the pilot for the full period and $25 for completing the pilot survey. Pilot participants continued to receive and pay their “normal” bimonthly utility bills. Separately, participants received monthly electricity usage statements that showed their electricity supply charges on their respective pilot price plan, as illustrated in Figure 1. Customers were not provided with any other new channels for information, such as a website or in-home display. A control group that continued being billed at standard rates was also included in the study. Three pricing structures were tested in the pilot, with 125 customers in each group: Time-of-use (TOU). Ontario’s TOU pricing includes off-peak, mid-peak and peak prices that changed by winter and summer season. TOU with CPP. Customers were notified a day in advance that the price of the electricity commodity (not delivery) for three or four hours the next day would increase to 30 cents per kilowatt hour (kWh) – nearly six times the average TOU price. Seven critical peak events were declared during the pilot period – four in summer and three in winter. Figure 2 shows the different pricing levels. TOU with CPR. During the same critical peak hours as CPP, participants were provided a rebate for reductions below their “baseline” usage. The base was calculated as the average usage for the same hours of the five previous nonevent, non-holiday weekdays, multiplied by 125 percent. The results from the Ontario pilot clearly demonstrate that customers want to be engaged and involved in their energy service and use. Consider the following: Within the first week, and before enrollment was suspended, more than 450 customers responded to the invitation letter and submitted requests to be part of the pilot – a remarkable 25 percent response rate. In subsequent focus groups, participants emphasized a desire to better monitor their own electricity usage and give the OEB feedback on the design of the pricing. These were in fact the primary reasons cited for enrolling in the pilot. In comparison to the control group, total load shifting during the four summertime critical peak periods ranged from 5.7 percent for TOU-only participants to 25.4 percent for CPP participants. By comparing the usage of the treatment and control groups before and during the pilot, a substantial average conservation effect of 6 percent was recorded across all customers. Over the course of the entire pilot period, on average, participants shifted consumption and paid 3 percent, or $1.44, less on monthly bills with the TOU pilot prices, compared with what they would have paid using the regular electricity prices charged by their utility. Of all participants, 75 percent saved money on TOU prices. Figure 3 illustrates the distribution of savings. When this shift in consumption was combined with the reduction in customers’ overall consumption, a total average monthly savings of more than $4 resulted. From this perspective, 93 percent of customers would pay less on the TOU prices over the course of the pilot program than they would have with the regular electricity prices charged by their utility. Citing greater control of their energy costs and benefits to the environment, 7 percent of participants surveyed said they would recommend TOU pricing to their friends. There were also some unexpected results. For instance, there was no pattern of customers shifting demand away from the dinnertime peak period in winter. In addition, TOU-only pricing alone did not result in a statistically significant shifting of power away from peak periods. CONCLUSION In summary, participants in the Ontario Energy Board’s pilot program approved of these smarter pricing structures, used less energy overall, shifted consumption from peak periods in the summertime and, as a result, most paid less on their utility bills. Over the next decade, as the utility industry evolves to the intelligent utility network and smart metering technologies are deployed to all customers, utilities will have many opportunities to implement new electricity pricing structures. This transition will represent a considerable technical challenge, testing the limits of the latest communications, data management, engineering, metering and security technologies. But the greater challenge may come from customers. Much of the benefit from smart metering is directly tied to real, measurable and predictable changes in how customers use energy and interact with their utility provider. Capturing this benefit requires successful manipulation of the complex interactions of economic incentives, consumer behavior and societal change. Studies such as the OEB Smart Pricing Pilot provide another step in penetrating this complexity, helping the utility industry better understand how customers react and interact with these new approaches. Filed under: White Papers Tagged under: AMI/AMR, Case Studies, Chris King, Customer Empowerment, James Strapp, Pricing, Smart Grid, Utilities About the Author Chris Trayhorn, Publisher of mThink Blue Book Chris Trayhorn is the Chairman of the Performance Marketing Industry Blue Ribbon Panel and the CEO of mThink.com, a leading online and content marketing agency. He has founded four successful marketing companies in London and San Francisco in the last 15 years, and is currently the founder and publisher of Revenue+Performance magazine, the magazine of the performance marketing industry since 2002.