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Article Excerpt
In this issue ...
Ontario has made a commitment to introducing smart electricity meters and dynamic pricing choices. That is commendable. The meters will help consumers to cut their electricity payments by using less power during peak demand periods. Less consumption at peak times will lessen the need for new generating capacity. However, achieving these results will depend on how the program is implemented.
The Study in Brief
Evidence from a major electricity pricing experiment in California strongly supports the Ontario government's decision to begin introducing smart meters and more economically rational pricing. It also identifies a number of pitfalls that all provincial governments should avoid if the financial benefits of meters and innovative pricing are to exceed the substantial investment and operating costs associated with them, as well as with the associated communications and billing systems and hardware.
Ontario, which was historically a winter peaking province, became a summer peaking province during the past five years, with increased use of air conditioners and slow growth of heating loads. Ontario's Conservation Task Force has estimated that demand-side measures can offset 1,350 megawatts of the significant growth in peak demand that is likely to occur over the next decade.
Dynamic pricing programs can make a contribution toward this goal. As shown by California's experience, it is feasible for customers to respond to price signals. For such programs to be cost-effective, though, the value of the reduction in peak load must be greater than the cost of smart meters. This is likely to require that governments introduce significant price increases, reflecting the marginal cost of both generation and transmission and distribution savings, on at least a few days of the peaking season.
Relatively modest price increases are unlikely to induce sufficient demand response to offset the costs of smart metering. Another key lesson worth noting from the California experience is that critical-peak pricing rates are likely to be more effective than traditional time-of-use rates.
Yet another insight is that, if asked to volunteer for a time-varying rate, the vast majority of consumers will refuse to do so. The major barrier is consumer inertia. Governments should not simply require that smart meters be installed and expect consumers to voluntarily sign up for time-varying rate options.
The central issue that the Ontario government must examine carefully is how to implement the rollout of smart meters in such a way that the costs do not exceed the benefits.
Ontario experienced a power crisis in the summer of 2003, when the demand for electricity exceeded available in-province capacity at peak times, necessitating expensive power imports (Trebilcock and Hrab 2003). Above average temperatures led to increased air conditioning loads that raised peak demand. This happened at a time of dry weather conditions, which reduced hydroelectric capacity, further exacerbating the imbalance between demand and supply. Because electricity rates did not vary by time-of-day, customers had no financial incentives to reduce peak loads. Some load reduction probably did occur due to public appeals, but it is unclear whether it would have been sustained over time.
In the aftermath and following aborted market reforms, the government of Ontario has made a commitment to introducing smart meters and dynamic pricing choices in the province and it is developing policies to implement these options. This Commentary describes alternative pricing concepts, including time-of-use (TOU) and critical peak pricing (CPP), identifies other jurisdictions where such pricing designs were implemented, and reviews the results of a large-scale pricing experiment in California.
In Ontario, dynamic pricing of electricity is currently limited to the very largest industrial and commercial customers. Approximately 90 industrial customers directly connected to the transmission grid are billed on an hourly basis through interval meters, accounting for 15 percent of electricity demand. The Independent Energy Market Operator estimates that an additional 20 percent of electricity demand is attributable to industrial customers that have interval meters but are not directly connected to the transmission grid. These users responded to time-varying prices during the crisis of 2003. To further enhance demand response in the province and mitigate the adverse economic impact of future crises, it would be necessary to extend time-varying pricing to residential and small commercial and industrial customers.
In April 2004, while speaking to the Ontario legislature, Premier Dalton McGuinty signaled his government's intention to move in this direction by installing "a smart electricity meter in 800,000 Ontario homes by 2007 ... and in each and every Ontario home by 2010." These smart meters, "combined with more flexible pricing," would provide an economic incentive for customers to reduce energy consumption during the peak hours of the summer season, when the cost to generate electricity is much higher than at other times of the year. Smart meters have the capability of measuring customer usage in short time intervals of 15 minutes Or an hour as opposed to standard TOU meters that can measure monthly consumption using only two or three time periods per day.
On July 16, 2004, the Minister of Energy asked the Ontario Energy Board (OEB) to develop an implementation plan to achieve these goals. Subsequently, the OEB issued a draft implementation plan for comment and discussion (OEB 2004). The draft plan states that large customers with peak demands greater than 200 kilowatts (kW) will be the first to get new meters, followed by industrial and commercial customers with peak demands between 50 and 200 kW and all new installations, including newly constructed homes. By 2010, all 4.3 million homes in the province will have a smart meter.
The OEB is also developing a regulated price plan that will feature prices that vary by time of use. (1) These prices were announced in March 2005--but will only apply to customers with smart meters. They feature three pricing periods during weekdays with a ratio of 3:1 between the peak and off-peak periods. The prices...
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