A Survey of Utility Experience with Real Time Pricing

Under real time pricing (RTP) tariffs, electricity consumers are charged prices that vary over short time intervals, typically hourly, and are quoted one day or less in advance to reflect contemporaneous marginal supply costs. RTP differs from conventional retail tariffs, which are based on prices that are fixed for months or years at a time to reflect average, embedded supply costs. In recent years, a resurgence of interest in RTP has occurred. Economists recognize that providing electricity consumers with price incentives to reduce their usage when wholesale prices rise would improve the performance of wholesale electricity markets in two important ways: mitigating suppliers' ability to exercise market power and dampening price volatility. Policymakers engaged in electric utility resource planning have also recognized that, by reducing peak demand, RTP could play an important role in a portfolio of strategies for cost-effectively meeting utility load obligations. While other mechanisms can be used to induce price responsive demand and/or reduce peak demand, many economists argue that RTP represents the most direct and efficient approach, and therefore it should be the primary focus of policymakers' efforts to improve the performance of wholesale and retail electricity markets (Borenstein et al. 2002).

While clearly appealing from a theoretical perspective, questions remain about the extent to which RTP can ultimately affect wholesale market performance and utility resource planning. First, assuming that RTP is offered on a voluntary basis, how many customers would choose to enroll in RTP, given the additional risks and transaction costs compared to traditional, fixed price retail supply service? Second, even if a sizable number of customers did choose to enroll, to what extent, and how consistently, would a diverse population of participants respond to the prices they face? Some insight into these issues can be gleaned from experiences with several prominent RTP programs frequently featured in the literature. However, to understand the potential role of RTP in settings with substantially different types of customers and/or different market and regulatory conditions, policymakers require a wider base of experience.