THE RESPONSE OF INDUSTRIAL CUSTOMERS TO ELECTRIC RATES BASED UPON DYNAMIC MARGINAL COSTS

1. THE RESPONSE OF INDUSTRIAL CUSTOMERSTO ELECTRIC RATES BASED UPONDYNAMIC MARGINAL COSTS Joseph A. Herriges, S. MostafaBaladi, Douglas W. Caves, and Bernard F. Neenan Kamil, ID: 87043531

2. Recent advances in technology and in the theory of electric utility operations and planning have led to an increased interest in rate and service options that are differentiated over short time intervals.

3. OBJECTIVE: to measure the response of large industrial customers to dynamic, fully time-differentiated, marginal cost-based electricity rates over a broad range of industries.

4. Real-time pricing (RTP) of electricity encompasses a range of possible service options, featuring prices that reflect the constantly changing costs of supplying electricity Compared to conventional or time-of-use rates, real-time prices more accurately represent marginal costs at each point in time.

5. This paper describes the results of an RTP experiment at Niagara Mohawk Power Corporation.

6. in the 1970s and 1980s. However, there are fundamental differences between the earlier experiments and current RTP experiments. First, because RTP experiments involve large users, both the utility and the customer risk substantial funds, often measured in the millions of dollars.

7. the RTP studies are targeted at customers who possess the commercial and political wherewithal to frustrate mandatory participation. Hence customers in each experiment are volunteers, creating the potential for self-selection bias.

8. The HIPP tariff (Hourly Integrated Pricing Program) 1) was designed to provide customers with hourly price signals set as close as possible to marginal cost 2) is a two-part tariff, consisting of a marginal cost based hourly energy price ($/kWh) and an access charge that is independent of the customer's current usage. 3) Notification of the twenty-four hourly prices for each day is given to the customer on the afternoon of the preceding business day.

9. the HIPP program compared to the standard time-of-use tariff. The access charge was designed to satisfy two principles: (1) independence from the customer's usage patterns under HIPP (2) ex ante revenue neutrality

10. The target population for the experiment is Niagara Mohawk's large commercial and industrial Class (i) Large users were chosen because they are most likely to generate RTP benefits that exceed metering, communications, and administration costs. (ii) They are more likely to invest the resources required to understand and evaluate the HIPP tariff. (iii) Niagara Mohawk has historical load research data for these firms, which are necessary for calculating the HIPP access charge and for analyzing customer response to RTP.

13. (i) The first set of statistics in table 2 shows that the load growth of the control group, 5.1%, surpassed that of the test group, 1.5%. Thus, HIPP did not result in an increase in total energy.

14. (ii) The second set of descriptive statistics compares the average price of electricity under the HIPP and standard rates for both test and control customers using usage levels from the eight test months. As expected, given the revenue neutrality of the HIPP rate, there is little difference in the average price of electricity under the two tariffs for control customers. The test customers‘ average price is over 6% lower under HIPP than under the standard rate. Given their modest load growth of 1.5%, this difference in average price indicates an ability to shift loads away from highpriced hours.

15. (iii) The third set of statistics examines test period usage relative to the baseline loads during high priced hours. The hour of greatest interest to the utility has traditionally been the hour of system peak. Table 2 shows that during this hour the average test customer reduced loads from their baseline level by 13.2%, while the average control customer increased loads by 4.5%.

16. B. Price Index Analysis where Ek(t) and Pk(t) denote the usage and price levels during the hour t (t = 1, . . ., T) of experimental period k (k = 0 for baseline; = 1 for test).

17. Specifically, the response index is defined as R=(F1/F0)/(L1/L0). (ii) adjusts for the change in the level of electricity prices imbedded in the HIPP tariff and, thus, isolates the change in unit costs due to load shifting. (iii) if the firm does not respond to the HIPP price signal, then F'/F0 = L'IL0 and R = 1

19. Responses are classified into four categories: strong (R < 0.990), moderate (0.990 < R < 0.995), weak (0.995 < R < 1), and none (R 2 1). Again, the results suggest that test customers responded to HIPP prices by shifting loads. The individual customer monthly results show that 32% of the test customers monthly results fall into the moderate to strong response categories, while only 14% of the control customers fall into these categories.

20. C. Econometric Analysis C= C{P[P(1), ..,~P(T)], Q(1),. .., Q(M), Y} These price changes cause intraday and interday shifts as determined by the two elasticity parameters, σH= 1- ʎ and σD= 1 - y. A price change in any hour causes usage shifts in other hours of the same day according to the partial Allen elasticity of substitution σH. The resulting change in the daily price index Dd causes shifts in other days of the month through the partial Allen elasticity of substitution parameter, σD. The parameters ad, h and Pd determine the load shapes under flat rates.

23. The interday and intraday elasticities are all positive, as expected, and most are statistically different from zero at a 1%!!!

24. Conclusion (i) Some firms are able to shift their usage patterns in response to real-time rates, and in particular at the hour of system peak. (ii) The response to RTP, however, was not uniform among participating firms, with two customers providing the bulk of the measured response

25. Thank you for attention