What Is Real-Time Pricing?
Real-time pricing (RTP), also known as dynamic pricing, is a utility rate structure where the per-kWh charge changes each hour depending on the utility's real-time production costs.
With real-time pricing, energy providers set their rates for a specific period on an advance or forward basis, and they may vary based upon changes in the market.
Despite the name, hourly prices for electricity can be based on day-ahead wholesale market rates, which gives customers time to plan their consumption decisions based on the previous day's price.
The rate is intended to signal customers when electricity could be shifted (i.e., moved to another time of day) or conserved, but also if it is time for an increase.
History of Real-Time Pricing
Before the US restructured its electricity in the 1990s, the marginal cost of producing electricity was recognized and could change hourly.
Economists have argued for many decades that retail electricity prices should fluctuate accordingly, but the technology for hourly meter consumption proved costly.
In the last half of the 20th century, a system to approximate RTP with standard technology was created. However, it was used only for large commercial and industrial customers because of its cost.
As metering technology improved, some utilities began to experiment with RTP.
Georgia Power, the pioneer and leader of RTP, introduced this program in 1991 to industrial customers. By 2000, close to one-third of its electricity demand was on RTP.
The California crisis in the summer of 2000 paved the way for the recognition of RTP that could lower prices during supply shortages and reduce the sellers' incentive to practice market power by making demand more lenient.
How Does It Work?
With real-time pricing, electricity rates vary hour-to-hour based on electricity demands. This requires an installation of a smart electricity meter that can send and receive information about electricity consumption and costs and provide consumers with more information about their usage.
Load curve can determine the occurrence of price variation. The load curve presents the load variation on the generating station with respect to time.
When the demand for electricity on a grid reaches its maximum, prices will reach their highest. This allows customers to limit their energy usage during these periods and shift it elsewhere to avoid excessive costs due to high rates per kilowatt-hour (kWh).
This process of controlling the electric energy usage during the high demand periods to reduce the billing amount is called demand-side management.
Ideal RTP Customers
Real-time pricing is more suitable for customers who can adjust their demand in response to RTP prices, such as:
Residential Consumers
Residential consumers should shift their usage to off-peak hours, which offers a significant price reduction.
Energy-Intensive Businesses
Industrial and manufacturing companies are perfect for real-time pricing because they understand the cost of electricity and how to use it. They also have large budgets that motivate them to find cheaper options for their usual million dollars spent on electricity.
Real-Time Pricing Program Types
Here are a couple of the most popular real-time pricing plans available to customers:
One-Part: One-part programs are the simplest. They charge customers hourly for their electricity consumption at real-time prices.
Two-Part: In a two-part program, real-time prices only apply to electricity usage over a customer's baseline load. It can protect inflexible customers from significant financial losses and increase savings for flexible customers.
Day-Type: Day-type RTP programs use fixed predefined rates for the season, time of day, or week based on previous temperature data to calculate the supply charge.
Temperature-Based: Prices align with daily temperature and can work less well for consumers who cannot shift their loads away from high-temperature days.
However, these programs benefit customers who use solar power on those occasions as it reduces the need to use costly electricity resources during peak times with high demand levels.
Block-Based: Real-time prices in the block-based program are transferred to time-of-use block prices calculated by taking the average of the real-time prices of that period.
Issues in Implementing Real-Time Pricing
Mitigating Customer Price Risk
Many customers are concerned about the high base electricity rates that can exceed RTP prices and often complain about the risk of using real-time pricing. However, this is not necessarily true as prices can be low during off-peak hours if consumers respond promptly to price signals.
Time-Varying Prices Versus Average Price Levels
In comparison to customers who pay average prices, RTP customers can save a significant amount of money on their electricity bills—provided they adjust their usage patterns. However, the problem arises with inconstant rates and sudden price spikes.
Distributional Impacts of Adopting RTP
The distributional impacts of real-time pricing depend on the design of an RTP plan, particularly with respect to its ability to meaningfully shift load from peak times.
For instance, if customers cannot shift their usage in time, there will be no difference between the bill amounts before and after applying real-time prices.
"Mandatory" Versus Voluntary Implementation
A real-time pricing program can be mandatory or voluntary. Implementing mandatory programs can result in significant cost savings for the utility, but it might come with political and public relations costs. Voluntary real-time pricing is likely to have a low participation rate.
The Bottom Line
Real-time pricing allows customers to pay based on what they use at any given point, rather than charging them a flat fee based on average use.
By understanding their hourly electricity usage, customers can adjust their load accordingly to take advantage of off-peak hours with low prices.
The primary benefit is that customers are incentivized to change their behavior in times of high or peak demand. There are many programs available through real-time pricing that require participation from both utilities and customers, which can make it challenging to implement.
While the implementation of real-time pricing programs varies from one utility to another, it can provide an opportunity for utilities to manage their costs and a mechanism for customers to save money on their bills.
FAQs
1. What Is real-time pricing?
Real-time pricing (RTP) is an electricity rate designed to reflect supply and demand conditions. Instead of charging a flat fee, substations can charge different rates for electricity at various times based on market conditions.
2. How does RTP work?
RTP varies the price of electricity by the hour, depending on wholesale market prices and demand. Electricity rates can change as often as every second during RTP periods. Also, RTP customers are charged for using electricity at different rates depending on the time of day.
3. Who are the ideal real-time pricing customers?
Customers who can shift their load profiles in response to RTP prices—that is, they can adjust their usage of household appliances and electronic equipment when prices change.
4. How is electricity price determined?
The price of electricity in real-time reflects the interaction of supply and demand. Higher demand on the grid will see suppliers raise prices to match. In times with surplus power, prices fall to encourage customers' usage of it.
5. What are the benefits of real-time pricing?
Real-time pricing can significantly influence consumer behavior to save money. It provides a mechanism for customers to reduce their bills by making changes to their demand profiles. Additionally, it encourages utilities to use electricity more efficiently and reliably since they have direct incentives from cost savings.
