By: James Strapp & Matthew Zafuto, IBM Global Energy & Utilities Industry, Canada/USA
Across the globe, energy policy makers are exploring new ways to use electricity prices to engage with customers more directly. Driven by changing customer expectations of their energy providers and government and regulatory responses to those changes utilities now need to understand how to introduce pricing that results in a more positive environmental impact and greater customer satisfaction.
At IBM, we see this application of innovative pricing as one aspect of an industry transition to the intelligent utility network, or smart grid. Moving from an analogue, data-poor grid to a digital, information-rich energy network enables a much closer interaction with customers and a much greater ability to meet many of the conflicting demands being placed on today’s utilities. The need to move to the intelligent utility network and a change in pricing structures are apparent. The specifics of the best approaches to structuring electricity prices and interacting with customers to change behaviours are not. One study has grappled with these issues, with some very positive results.
Need for engagement
It is clear that meeting a growing demand for energy while achieving emerging climate change targets will necessitate new investment in infrastructure with simultaneous reductions in the impact of electricity generation based on fossil fuel. But no matter how effective supply side measures, such as fuel switching and cleaner coal technologies, are the demand side must have an equal focus. More immediate and in some instances more dramatic results can be obtained through energy efficiency and the shifting of load than through more long-term changes in generation fuel sources or technologies. It is also becoming increasingly clear that around the world, customers are expecting and, indeed, demanding that they become part of the solution.
The traditional customer concerns about electricity costs are being joined by more sophisticated concerns related to reliability and environmental impact. The proliferation of electronics in homes and businesses has elevated the importance customers place on reliability.
In a recent IBM survey of nearly 1900 households in six countries (Figure 1), of the 27 per cent of respondents who knew what power quality means, over 90 per cent believe it is important and 30 per cent would pay a premium for it. This desire for greater reliability is expected only to grow. Take, for instance, the fact that populations of pensioners in mature economies will grow by 50 to 100 per cent over the next 15 to 20 years, so the number of health-critical electric devices will also grow.
In addition to reliability, customers also want to make choices about components of their electricity service, even in areas where they are not able to choose who provides it. In the same survey, more than half of respondents indicated that they want energy sources to be environmentally friendly. Some 61 per cent indicated that they would change usage habits if that change would benefit the environment, while 62 per cent would install, maintain and operate their own electricity generation system if they could sell power they do not consume back to the utility.
These survey results are part of a new report recently released by IBM Global Business Services, Plugging in the Consumer: Innovating Utility Business Models for the Future. The report forecasts how the change in energy customers’ expectations will impact the utility industry’s business model in the next five to ten years and predicts a steady progression toward a participatory network in which consumers actively ‘plug in’ to their energy decisions to a degree not seen before.
Smart metering, smart prices
A central component to any response to customer demand is pricing. No technology is changing how electricity is priced as much as metering. Improving telecommunications capabilities at lower cost has dramatically increased the financial viability of ‘smart’ or ‘advanced’ metering. Digital meters can remotely collect much more granular information about consumption, power quality and quality of service.
Smart metering technologies are making it possible to provide residential customers with the sophisticated smart pricing previously reserved only for large commercial and industrial customers. A smart metering system, with appropriate data analysis and billing systems, can enable a number of innovative pricing and service regimes. The characteristics are really only limited by the imagination. Some examples on offer today or under review for residential customers include time-of-use (TOU), in which the price varies consistently by the day of the week or time of day, typically with two or three pricing tiers. Another example is critical peak pricing (CPP), in which prices during specific days or hours in the year are increased dramatically to reflect the actual or deemed price of electricity at that time. The critical peak rebate (CPR) system reimburses customers for using less power during specific periods, and real-time pricing sees prices vary in tune with the market or similar price for power.
A pricing regime may notify customers in the middle of the billing period if their consumption exceeds a certain threshold. Also, price adjustments can reflect customer participation in load control, distributed generation or other programmes. Pricing can also be based on the quality of power and reductions can be given for service disruptions. Customers could also be allowed to readily access more up-to-date information about the energy demand in kilowatts and usage in kilowatthours through an in-home display monitor or enhanced website.
The key question for utilities and policy makers is which pricing and communications structures will most actively engage their customers in their environment and result in the conservation behaviours desired. The Province of Ontario in Canada presents a particularly valuable example of one approach.
Smart Price Pilot
In 2004, faced with a serious 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, covering about 4.5 million customers.
The plan was to introduce flexible, TOU electricity pricing to encourage conservation and peak shifting as these meters were deployed. Ontario’s electricity industry regulator the Ontario Energy Board (OEB) was responsible for designing the smart prices to go with these smart meters. In June 2006, it commissioned IBM to manage the OEB Smart Price Pilot, a programme to help determine the best structure for prices and the best ways to communicate these prices.
By 1 August 2006, 375 residential customers in the Ottawa area of Ontario had been recruited into a seven-month pilot. 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 bi-monthly utility bill. Separately, participants received monthly electricity usage statements that showed their electricity supply charges on their respective pilot price plan (Figure 2). Customers were not provided with any other new channels for information, such as a website or in-home display.
Figure 2: Sample of an electricity usage statement provided monthly to each of the OEB pilot participants
Three pricing structures were tested in the pilot, with 125 customers allocated to each structure (plus a control group). The first was TOU, in which Ontario’s TOU pricing includes off-peak, mid-peak and peak prices that change by winter and summer season. The second was TOU with CPP, in which customers were notified the day ahead that the price for the electricity commodity (not delivery) for three or four hours the next day would increase to $0.30 per kWh (about five times the average regular electricity price). Seven critical peak events were declared during the pilot period four in summer and three in winter (see Figure 3 for the prices). The third pricing structure was TOU with a CPR, in which during the same critical peak hours as CPP, participants where provided a rebate for reductions below their ‘baseline’ usage. The baseline for each participant was calculated as their average usage for the same hours of the five previous non-event, non-holiday weekdays, multiplied by 125 per cent.
Figure 3: Sample refrigerator magnet provided to all participants that details the TOU and critical peak prices in place at the start of the OEB pilot
Results from the Ontario pilot clearly demonstrate that customers want to be engaged and gain greater involvement in their energy service. Within the first week (and before enrolment was suspended), more than 450 customers had responded to the invitation letter and submitted a form to be part of the pilot. This is a remarkable response rate of 25 per cent. In subsequent focus groups, participants highlighted a desire to better monitor their own electricity usage and give the OEB feedback on the design of the pricing as the primary reasons for enrolling in the pilot.
In comparison with a control group, total load shifting from peak periods during the four critical peak events in summer ranged from 5.7 per cent for TOU-only participants to 25.4 per cent for CPP participants. A comparison of the usage of the treatment and control groups before and during the pilot detected a substantial 6 per cent average conservation effect across all customers.
This result was unexpected because a similar major pilot in California realized no conservation effect. Over the course of the entire pilot period, participants on average shifted consumption and paid three per cent, or $1.44, less on monthly bills with the TOU pilot prices than they would have paid on the regular electricity prices charged by their utility. Over all participants, 75 per cent saved money on TOU prices (see Figure 4 for the distribution of savings).
Figure 4: Distribution of savings by OEB pilot participants on all three TOU prices compared with regular electricity prices. Each dot represents a participant
When that shifting was combined with the impact of reducing their overall consumption, there was a total average monthly saving of over $4. From this perspective, 93 per cent of customers would pay less on the TOU prices over the course of the pilot than they would on the regular electricity prices charged by their utility. Citing greater control of their energy costs and benefits to the environment, 78 per cent of participants surveyed would recommend TOU pricing to their friends.
Not all results, however, were as expected. For instance, no pattern of shifting from the peak periods in winter could be discerned. The focus groups shed more light on this result for the OEB. Participants highlighted the lack of a major discretionary household appliance, similar to air-conditioning, which they would use less during the winter.
Also, while TOU-only pricing alone resulted in some shifting of power from peak periods, the degree of shifting was substantially lower than CPP and CPR. In summary, participants in the OEB’s pilot liked these smarter pricing structures, they used less electricity overall, they shifted consumption from peak periods in the summer and, as a result, they paid less.
The OEB’s Smart Price Pilot is one of numerous studies exploring innovative electricity pricing and customer engagement models. The OEB has approved other pilots in Ontario that look at different customer segments and customer feedback mechanisms, including in-home displays.
Elsewhere, numerous studies have highlighted the ability of dynamic pricing structures enabled by smart metering to positively influence customer behaviours and satisfaction. IBM has been closely involved in other notable smart grid/smart meter projects. For example, the US Department of Energy’s Pacific Northwest GridWise Demonstration Project, in which 112 homeowners in Washington and Oregon state were able to customize thermostats, water heaters and dryers to a desired level of comfort or economy. On average, participants in this study saved about 10 per cent on their electricity bills while reducing peak energy consumption by as much as 50 per cent for periods of up to three days. IBM has also been involved in EnBW’s initiative to be the first utility in Germany to offer advanced energy service via smart metering at the residential level. EnBW is designing a flexible solution that will enable the company to define, publish, communicate and bill for TOU consumption.
Its solution includes a means to integrate smart devices inside the household that can be used to publish prices and inform the customer of their consumption on a near-time basis. The project, called Energy Butler, will be piloted in 2008. EnBW predicts that the solution will provide a comprehensive view on influencing consumption behaviour based on real-time pricing and tariff structure.
Several other ongoing or planned projects also bear watching: In a follow-up to its 2006 study of how real-time, in-home displays result in reduced energy consumption, Ontario’s Hydro One is assessing the extent to which these displays help affect customer behaviour when combined with TOU pricing.
On behalf of the UK’s Department for Business, the country’s gas and electricity industries regulator Ofgem is coordinating four two-year trials of smart meters and clip-on displays. Four energy suppliers and nearly 40 000 households are taking part in the trials to measure different ways to reduce overall energy consumption. These trials will be particularly valuable for programmes that target energy conservation in climates in which summers are not hot.
The US is piloting time-sensitive pricing at PowerCentsDC in Washington DC and various real-time pricing schemes in the US Midwest.
The state of Victoria in Australia has initiated smart metering and smart pricing trials before its planned roll-out of smart meters across the state by 2012. No matter what the specifics of the results, all of these and other studies will be valuable in planning the transition to an intelligent utility network.
Opportunities for new electricity pricing structures will be made possible as the industry transitions to the intelligent utility network and as smart metering technologies are deployed to all customers over the next decade. This transition will be a considerable technical challenge that tests the limits of the latest technologies in communications, data management, engineering, metering and security. But perhaps the greater challenge will 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 the utility. Capturing this benefit requires the manipulation of the complex interactions of economic incentives, consumer behaviour and societal change. Studies such as the OEB Smart Pricing Pilot are one step in the ongoing exploration of this complexity, helping us to better understand how customers react and interact with these new approaches.
For more information about the Ontario pilot design, approach and results, see web pages www.oeb.gov.on.ca/html/en/industryrelations/
ongoingprojects_regulatedpriceplan_smartpricepilot.htm and www.oeb.gov.on.ca/html/en/industryrelations/
ongoingprojects_regulatedpriceplan_smartpricepilot.htm. Also, look for ‘Ontario Smart Price Pilot’ on the OEB home page (www.oeb.gov.on.ca).
The authors would like to acknowledge Chris King and Sharon Talbott of eMeter Strategic Consulting; Dr Frank Wolak of Stanford University; and the staff of the Ontario Energy Board and Hydro Ottawa for their considerable work in the OEB Smart Price Pilot.