Brattle principal Ahmad Faruqui has recently authored an article for Electricity Policy that explores the use of dynamic rates and the benefits for both consumers and the electricity industry.
The article discusses how despite the benefits of dynamic rates, which include greater economic efficiency to the electricity industry, environmental benefits, greater cost savings, and reduced need for new power plants, many regulators have resisted their implementation. This resistance is due to beliefs that dynamic rates are seen as punitive or unfair to consumers. According to Dr. Faruqui, regulators tend to view flat rates (i.e., the same rate for all consumers) as equitable, they fear that dynamic rates will suddenly raise prices significantly, and they believe that dynamic pricing requires implementing costly technology.
Dr. Faruqui’s article addresses these concerns toward dynamic pricing and provides evidence to disprove these commonly-held beliefs. He points out a recent analysis he conducted on behalf of a utility, which found that among low-income customers, 80 percent saved with critical peak pricing (CPP), a dynamic pricing rate in which participating customers pay higher prices during the few days when wholesale power prices are the highest or when the power grid is severely stressed. Dr. Faruqui concludes that CPP represents a good hybrid between a flat rate and real-time prices, and recommends that regulators switch from a flat rate to CPP as a default rate, allowing consumers to opt-out and select other pricing alternatives.
To view Dr. Faruqui’s article, “For Customer Savings and Economic Efficiency, the Time for Dynamic Rates is Now,” please visit Electricity Policy’s website.