- Adam Fremeth
- Aug 30, 2018
Do you embrace smart energy technologies that fit your environmental consciousness and high-tech lifestyle? Are you seeking out alternatives that save you money on your electricity bill or are you waiting for your electric company to impress you with something and then may jump on board? Or are you fine with the status quo of your bill and electric company’s offerings and just want safe, reliable and reasonably priced power?
These were the questions that kicked off the IESO’s 2018 Electricity Summit and that got us at Ivey thinking about doing something different, too. This is the first installment of the new Ivey Energy Policy and Management Centre blog – EnergyMatters@Ivey – which will offer a fact-based perspective on pertinent matters for Canada’s energy sector.
The Electricity Summit is an annual event that Ontario’s Independent Electricity System Operator organizes to bring together various stakeholders from throughout the province, and this year’s theme was “Unlocking the Value of Innovation”. This is a well-trodden challenge for many sectors, but one that can be especially difficult for electricity distributors who have weak incentives and large obstacles to trying anything different. The Summit begun with a keynote address by Patty Durand of the U.S.-based Smart Energy Consumer Collaborative, a non-profit research institute focused on studying energy consumer behaviour. Ms. Durand presented the results of her organization’s 6th Wave of their Consumer Pulse and Market Segmentation Study which segmented electricity customers into five groups based upon levels of consumer awareness, knowledge, attitudes, perceived benefits and barriers around the adoption of smart energy-enabled programs and technologies. Interestingly, the Green Champions segment composed almost half of the U.S. electricity consumers surveyed. The following table was derived from Ms. Durand’s presentation.
These results are fascinating when you consider that Ontario is the single largest jurisdiction in North America in smart meter deployment with practically all residential consumers on a time-of-use (TOU) pricing scheme. So, the incentives are aligned for these segments to stand up (or not) to embrace smart energy-enabled programs and technology. Although very little about Ontario’s TOU program, to date, has considered how consumers differentially engage with smart energy technology or programs. The origin of the TOU program dates back to a 2004 ministerial directive to the OEB, and despite the curtailment of the conservation initiatives in Green Energy and Green Economy Act, the TOU program remains. The program has had some modest success in incenting load shifting; research estimates have suggested that it is responsible for reducing the summer peak between 1.18% to 3.26% (Brattle Group, 2016). The reductions, however, fall short of the government’s objectives, as noted by the Auditor General.
The culprit that is often identified behind the program’s limited impact is the pricing structure, specifically the peak to off-peak price ratio. Since the program’s inception, this ratio has danced around the 1.9x mark, in other words the on-peak price between 11a.m. and 5 p.m. is about double that of the off-peak price between 7 a.m. and 7 p.m. This difference may seem like a lot for most of us, but not for those living in Missouri where AmerenUE ran a pilot that set this ratio at 3.5X, or in California where Pacific Gas & Electric, San Diego Gas & Electric and Southern California Edison piloted a critical peaking program with a ratio of 6.5X. Research on the topic identifies that a ratio of at least 3X is generally needed (Charles River Associates, 2005), with ratios between 4X and 5X producing peak reductions that would be in-line with the government’s objectives (Faruqui, Sergici, and Warner, 2017). The research also demonstrates that the key to realizing even greater consumer responsiveness is the coupling of TOU pricing with enabling technologies, including smart thermostats or energy management smartphone applications that provide the consumer with greater control.
Given Ontario’s limited success with TOU pricing, the Ontario Energy Board undertook a multi-year review of the program starting in 2015, which has led to a new opportunity that may better allow consumers to unlock the value of TOU pricing and smart energy technologies. This has come in the form of pilot programs at LDCs across the province that will experiment with different pricing schemes, each with peak to off-peak price ratios at 4X or above. The pilot programs test out more customizable options, like Alectra’s Overnight Plan which offers a Super Off-Peak rate of 2¢/kWh from 12 a.m. to 6 a.m., and responsive schemes with critical event prices when the province is at the limits of its available electricity supply. These critical event prices introduce strong incentives for customers to reduce peak period consumption with peak to off-peak ratios of 9.9X in the case of London Hydro’s pilot or 10.1X for Alectra’s Dynamic Plan. Both these programs utilize technology that enables customers to better manage their electricity use. For instance, London Hydro installed a load controller in the homes of the 2000 participants that allows the utility to remotely turn off the power to three breakers during the 36 one-hour peak periods throughout the year. Customers can also manage this controller with a slick smartphone app that provides real time energy use updates and benchmarks.
These pilots will be studied closely when completed in 2019, but they should better inform us how Ontario can leverage the hefty investment that has already been made by all ratepayers in smart meter technology. The real trick, however, will be for the LDCs or possibly even third parties to better engage ratepayers with varying TOU or even more dynamic pricing options that best meet their needs or expectations. The challenge with the current scheme with its 1.9x time peak to off-peak ratio is that it emulates many of the features of tiered pricing that preceded it and is not able to meet the more sophisticated needs of today’s consumer, such as the Green Champions or Savings Seekers. Similarly, there is little opportunity for LDCs to nudge the Technology Cautious or Movers and Shakers to make small changes that could provide even greater gains for time shifting or even conservation. The IESO Summit made it clear that the leading LDCs of the future will be ones that study their residential customers closely, segment them effectively, and develop marketing strategies that align with diverse and changing needs. There will be plenty of technology providers seeking to augment how consumers engage with their electric company but the utilities with the support of the regulator will need to find how best to engage with each segment type.
The Ontario electricity system is at an important crossroads where new markets and opportunities are being developed and new players are entering the industry. The ratepayer is quickly becoming a sophisticated electricity consumer who is making new demands on LDCs. The investment in smart meters is sunk but the opportunities for how to best use them has just begun. Questions remain, however, as to who is willing to embrace these programs and whether our LDCs are the best ones to deploy them. The results of these experiments with TOU pricing schemes will prove to be an important step in designing sophisticated pricing schemes that meet the demands of a segmented consumer base.