Lesson 1: About the Grid
We hear about people living “off the grid,” but how much do you really know about “the grid.” By definition, a grid is a network of evenly spaced horizontal and vertical lines, though the U.S. national electricity grid stretches in many more directions as it carries power from generating stations to homes and businesses. According to Smartgrid.gov, the current U.S. electricity grid was built in the 1890s with improvements over time that resulted in a present-day count of 9,200 electricity-generating units with more than 1 million megawatts of generating capacity connected to more than 300,000 miles of transmission lines!
In the old days, power went in one direction—from the generation source to your home or place of business. With the advent of digital technology and renewable resources, information and energy began to flow in two directions—from your home or business to the power utility and back again. Even the transmissions lines sense information!
This is the Smart Grid, where computers, controls and automation work together to manage power. The Smart Grid has the ability to sense outages and reroute power to the locations where it is needed most. It can incorporate emergency generator and renewable power into the system, increase energy efficiency and give customers a better understanding of the connection between electricity usage and the environment.
Lesson 2: The Power of Time-based Pricing
The Smart Grid can use information to help customers save money by:
- Knowing how much power they use
- Understanding peak and off-peak generation
- Making better use of their resources
With time-based pricing connected to supply and demand, consumers can manage budgets without negatively affecting operations. This is especially good news for business managers who are responsible for large corporate spends on electricity.
“Peak demand” occurs at the time of day when the general need for electricity is greatest. High usage stresses the utility company’s capacity to generate electricity, and that leads to higher prices. “Time of Use” (TOU) rates help power-producers balance electricity production with consumption. These time-based rates are set in advance for customers who can shift their energy usage away from peak demand hours. To save money, a manufacturing facility that operates 24 hours a day might take advantage of TOU rates for its graveyard-shift operations. A municipality running water filtration and other systems around the clock can also benefit as can many other organizations.
Lesson 3: Zeroing in on Dynamic Pricing
TOU rates are good, but they aren’t perfect. These rates are set prior to actual production and do not reflect real-time electricity-generation conditions. With real-time or dynamic pricing utilities can offer highly flexible rates that can change within the hour. Because this connects price directly with supply and demand, it has the potential to offer the greatest savings.
Dynamic pricing is a concept most of us have been using for years when we book air-flight seats, visit Disneyworld on Tuesday instead of Saturday or even enjoy a cocktail at Happy Hour. Prices are lower when there is less demand, and if you are willing to change your behavior, you can pay less for the same services.
Dynamic pricing saves money for the utilities, too. With better ability to predict and manage demand, they can avoid the added equipment and production costs that accompany peak production. Dynamic pricing also lets consumers and producers use the smart grid’s capabilities to benefit from variables in the wholesale electricity market.
Lesson 4: Getting There
A dynamic pricing program has three basic requirements:
- Two-way communications between the consumer and the energy provider: The Smart Grid serves as the pathway for information.
- A smart meter to receive and send information: The Institute of Electric Efficiency (EEI) estimates that nearly all residential U.S. customers will have a smart meter by 2020.
- Consumer behavioral change: To save money through time-based pricing, consumers must change how and when they consume electricity.
With the first two requirements mostly taken care of, behavioral change is the final component needed to save money through time-based pricing.
Several utility providers around the country have launched pilot programs to help educate residential consumers about the advantages of dynamic pricing. While results have been positive, human behavior presents a challenging obstacle. Residential consumers like their creature comforts and don’t always value the trade-off between action and savings. For businesses spending millions of dollars annually on electricity, changing behavior to lower prices reaps greater rewards.
Read Part 2 of this article:
Dynamic Pricing: Who is the Ideal RTP Customer?
Keith Laake founded Cost Control Associates, Inc. in 1991 and has been responsible for strategic planning, marketing and sales, and overall management of the firm. He currently focuses on business development. Keith received his BBA from the University of Wisconsin and is a certified public accountant. Learn more.