Households face power-pricing revolution

December 3, 2009

John Kemp— John Kemp is a Reuters columnist. The views expressed are his own —

Households in the United States and the United Kingdom are about to experience a revolution in the way they pay for electricity.

Over the next decade, almost all homes will be fitted with “smart meters” recording the time as well as the quantity of electricity used. Most customers will face some form of dynamic pricing that relates the price they pay for each kilowatt hour (kWh) to the actual cost of generating it.

Smart meters and dynamic pricing are critical to using the generation and transmission system more efficiently while accommodating a growing share of renewables (wind, solar) on the grid without sacrificing reliability.


Power cannot be stored, and the amount demanded by customers (“load”) is highly variable, so system operators hold large amounts of generating capacity in reserve to cope with demand peaks or outages when generating units become unavailable.

Many generating units must be built and maintained even though they may only be used for a few hundred hours each year. The greater the variability in load the more idle capacity has to be maintained. In general, usage is higher during the day than at night, and higher in summer than winter, owing to increased airconditioning demand.

The problem will get worse over the next decade as the share of generation from renewables such as wind and solar, which cannot be scheduled in advance, increases. Even more back-up capacity will need to be held in reserve in case renewable power is not available at peak times.


The attached chart shows total demand across the power grid run by California’s Independent System Operator (CAISO) over the last twelve months. It covers about three quarters of consumption across the state.

While “average” load is around 27,000 MW, load rises sharply during daytime hours in the summer when airconditioning demand is highest.

On almost all hours throughout the year (more than 98 percent) load is less than 40,000 MW. But on a very small number of hours (less than 2 percent) load increases substantially, sometimes as high as 45,000 MW. Enormous amounts of capacity must be kept in reserve to meet the peak demand experienced for less than 180 hours a year.

Even the distribution’s tail understates the amount of capacity kept in reserve, since the system is designed to operate with a safety margin, ensuring peak demand can be met even if one or more large power plants becomes unavailable due to scheduled maintenance or a fault.

The safety margin is set so the system will be unable to meet peak hourly demand no more than nine times a century. If peak demand is 45,000 MW, the system needs to carry a substantial cushion of spare capacity above this level.

The safety margin is normally set to at least 10 percent. So CAISO needs to maintain access to more than 50,000 MW of capacity (45,000 MW peak load plus 10 percent), even though the system “typically” needs to meet only about half that power demand.


If CAISO could reduce demand on just the 2 percent of peak hours each year, it could avoid up to 5,000 MW of load and the need to maintain more than 5,000 MW of idle capacity.

The load curve’s steep tail explains why demand response strategies designedto curb power use at peak periods have become one of the highest priorities for governments and system engineers on both sides of the Atlantic.

At the moment, demand response is largely restricted to industrial power customers, especially those with large heating and cooling loads, many of whom are on interruptible contracts allowing the system operator to order them to shed load for a period from 30 minutes to several hours at peak times, in exchange for rebates or a lower tariff.

In future, officials hope households can be brought within the demand management system by fitting them with smart meters that will vary prices significantly at peak times and/or allow the utility to reduce non-sensitive loads such as refrigerators and airconditioners when the system is stretched.


Under existing plans, most residential customers in California will be fitted with smart meters by 2013. Britain’s Department of Energy and Climate Change has announced plans to have all households fitted with smart meters by 2020.

Smart meters will record consumption in five-second or hourly intervals, and be capable of transmitting the data back to a central control and billing centre. Each meter will have a display unit showing both usage and current prices.

Meters will be capable of communicating with programmable thermostats and other household electronic devices. In theory, control devices could be instructed to turn up airconditioning systems by a degree or two or shut down non-essential loads when prices hit a critical level.


Once meters have been rolled out, households will be shifted from fixed-rate tariffs to variable ones. Current systems allow customers to “opt-in” to variable pricing but there is likely to be less choice in future.

The simplest time-of-use (TOU) tariffs would establish a relatively simple system varying prices by time of day, day of week, and perhaps season of the year. Prices would be fixed in advance. The intention is to encourage households to “load shift”, moving as much consumption as possible from peak daytime periods to the night-time when there is plenty of spare capacity available.

TOU tariffs have already been implemented for many industrial and residential customers. But smart meters would enable much more radical reform.

In the most ambitious system, customers would face real-time prices (RTP) linking the price they pay directly to hourly prices in the wholesale power market.

In an intermediate system, critical peak pricing (CPP), customers would pay very high prices for a small number of peak hours each year — perhaps no more than three hours a day for a maximum of ten days each year. These critical periods would be announced a day or so in advance. The rest of the time, customers would be on a standard TOU tariff.

The aim of both RTP and CPP systems is to provide customers with a strong incentive to cut all avoidable demand during the few hours when the system is most stretched.


While customers would face high prices at peak periods under all three systems, overall bills could be lower if generating capacity can be used more efficiently and the need to maintain so much idle capacity in reserve is reduced.

Much would depend on how savings are distributed between customers and shareholders. But the potential is enormous.

Peak load across the United States is currently 810 gigawatts (GW) and forecast to grow by an average 1.7 percent a year to 950 GW in 2019. But in a report for the U.S. Department of Energy, the Brattle Group estimated 2019 peak demand could be lowered by between 82 GW and 188 GW through the wider deployment of demand response linked to smart metering and dynamic prices.

If demand response technologies were deployed in almost all homes across the United States, coupled with a strong dynamic pricing system, almost all forecast peak demand growth in the next ten years could be avoided.

Such an ambitious demand response program would avoid the need for a huge amount of new generation and transmission infrastructure, while making it easier to accommodate variable sources such as wind and solar by matching them with increased variability in demand.

Full demand response is unlikely to be achieved (or be cost-effective). Policy will instead blend demand response with more investment in renewables and construction of additional gas-fired generation and transmission capacity to provide back up.


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This is fine, indeed commendable, in theory. In practice, even as a proponent for conservation I can’t help being wary of so-called “smart meters,” given the disastrous price increases being reported by PG&E customers in California.At best, they would seem to indicate a very poor job of communication and transition assistance on the part of the utility; at worse they indicate that this is just another way for an honesty-challenged sector to rip off customers.

Posted by Matt K | Report as abusive

Lower energy bills. Uh-huh. Banks of MBAs have already figured out how to bury double-digit rate increases into the new rate structure.

Posted by Mark Eaton | Report as abusive

Blue sky thinking from yet another journalist. Power companies will use this as a ruse to increase prices so bills will go up not down. Any redistribution of monies will go to the shareholders, when do customers ever get a break over shareholders?This person also fails to mention that the smart meters cost over 300 pounds sterling in the UK, so I guess the price here will be similar and studies show will only save the customer about 23 pounds per year. Wow that really helps the man in the street.

Posted by Lee | Report as abusive

where’s my lengthy comment on this from yesterday? when they disappear, it tends to reduce my desire to comment at all.

Posted by TheOracle | Report as abusive

There are a few problems with the information presented here:
1) The graph from CAISO is labeled wrong. The X-axis is labeled “Hours per Year”. There are 8760 hours in a non-Leap year. You cannot have more total hours along the X-axis than exist in a year when you reference hours PER year.
2) The logic of reducing our peak demand will minimize standby power generation is flawed. We will still need the capability to produce all of the power to cover surges, even with solar and wind generation, which can fluctuate wildly.
3) TOU pricing is nothing more than another technique for charging more for electricity by complicating billing and thereby confusing the customer. Fixed pricing simply averages total cost over a period of time.
4) There is a reason that demand picks up when it does. Commercial operations consume significant amounts of power. These companies operate during the day. Shift their hours of operation to night-time and you would see the load shift as well. However, most people would rather not work at night. Residential power (not including AC) picks up when people get home from work and until they go to bed. The load from AC units is tied to the environment.
5) Commercial electric rates are not the same as residential rates, they are less (higher consumption = lower unit cost). I am concerned that the TOU policy will still give businesses a discount while spiking the prices for residential rates.

Other possible solutions:
1) Charge all customers the same rate no matter how much they consume. Won’t happen.
2) Limit AC cooling to 20 degrees F, applied to both residential and business. That means when it’s 100F outside could only cool to 80F. Again, won’t happen.

Posted by jyy | Report as abusive

When everyone has electrical storage, connected to the grid, on site, only then can power distribution be balanced. Off loading, off peak, and using stored power at peaks. As we build demand we need to look at development in a long term context.

We need to develope fussion. The money we have spent on this war would go far to develope this technology. It’s science should be held in an international trust that can be accessed by authorized memebers of the World community.

Meanwhile – We need to balance our use of, renewable energy sources, oil (maintianing a strategic price), and Nuclear Fission and the storage of it’s toxic waste (We must develope technology rendering it safe).

Let’s stop talking and agree on a rational strategy.

Posted by Ray2000 | Report as abusive

I think it is fairer to use smart metering–energy customers will pay for what they use and will be able to adjust consumption accordingly. If the cost of the smart thermostat is prohibitively expensive for some households, perhaps it should be subsidized. As for the suggestion above that customers pay the same rate, are you suggesting a fixed cost regardless of consumption? If so, that makes no sense whatsoever: Should all driver’s pay a flat fee for gasoline, regardless of how much they drive?

Yes, I think this will require some supervision of the power companies–as somebody commented earlier, utilities may be an “honesty-challenged sector.” But, the premise for smart metering makes perfect sense: charge customers the marginal cost their energy usage. If you use lots of power, yes, you will pay more; if you make an effort to conserve, you’ll pay less.

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