Time for Utilities to Expand Time of Use Rate Structures

Overview

The 1988 article on "Spot Pricing of Electricity” illustrated the cost of power varies by location, time of day, and season. Ever since this influential paper, utilities have been creating new market mechanisms, such as the wholesale energy markets, to make power more reliable and lower cost. With more intermittent generators on the grid, utilities are using the capability of Smart Grid technology to take TOU (Time of Use) to the next level.

Utilities want to provide customers reliable power at the lowest cost, and transition to non-carbon emitting power sources. Reliability, cost, and environmental responsibility are the three pillars that keep utilities up at night. However, the cost of the power changes during the day, over the seasons, and increasingly due to the wind and sunshine. When you pay your power bill every month, the utility needs to cover the cost to provide that power.

This Insight provides a closer look at TOU in a municipal power utility in the New England region.

The Cost of Power

ISO New England manages the “Wholesale Energy” market in New England. You can see this price in real time using the “HOURLY LMP GRAPH CHART” at: https://www.iso-ne.com/isoexpress/web/charts. LMP stands for “local marginal price” and this is the price utilities can buy or sell power in the so-called real-time market.

The chart below shows the actual LMP prices for an ISO-NE zone for a summer month and a winter month. This chart shows several interesting things.  Most notably, the chart shows a substantial difference in wholesale energy price from summer to winter, and it also shows you can reliably buy power at 1am and sell it at 5 pm for a profit as prices are based on the demand for power. Notice the grid is spaced in 24-hour increments for each grid line and the peak price happens at roughly the same time each day. If you can buy and store power between 1-5 am and sell it the next day between 5-9 pm you can make money every day. As you will see, this “arbitrage method” is only one way you can use energy storage devices to make money. It also shows the price can go to zero or even negative, as was the case at 4 am on January 13th (hour 292 in the month).

This volatility will increase with the expected addition of more wind and solar generation in the New England region over the next five years. Utilities lament “if only our customers would buy power when LMP price is low and use less power when LMP price is high it would make our grid easier to operate, reduce the cost of power, and enable us to add more wind and solar.” Of course, it is the utilities that must give customers the incentive to do that.

How Does a Utility and Their Customers Benefit from TOU?

TOU policy will vary for each utility and will depend on how that utility selects the rates, the time slots, the smart metering system, and how the utility estimates customer behavior. When developing a TOU policy, the utility must consider the specific details of their contracts to buy power for their customers. Few utilities simply buy power from the real-time market alone. PPA’s or Power Purchase Agreements can vary widely, and the purchased power may be a mix of fossil, nuclear, hydro, solar, wind, bio, geothermal and maybe some power from LMP to fill the gaps. As more utilities move to wind and solar, the LMP price seems likely to get very high at times. In New England, power cost (energy in megawatt hours or kilowatt hours) is reconciled on an hourly basis with ISO-NE involved in computing settlements.

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Keywords: Utilities, Time of Use (TOU), Electricity, Smart Grid, Energy Markets, ARC Advisory Group.