COLUMN-'Free power Saturdays' herald electricity pricing revolution: Kemp

Thu Aug 1, 2013 9:36am EDT

By John Kemp

LONDON Aug 1 (Reuters) - Centrica, which supplies electricity in the United Kingdom through its British Gas subsidiary, has said it could offer free power to residential consumers on Saturdays from next year, provided they have a smart meter installed.

"Free power Saturdays" are a masterful piece of marketing and illustrate how quickly smart metering will transform the way residential customers use and pay for electricity in Britain and around the world.

Unlike traditional accumulation meters, which measure the total power used over a quarter, smart meters record both the time and the amount of use in half-hourly periods. Centrica has already installed over 1 million of them in Britain, and the government wants every home to have a smart meter by 2020.

For smart meters to encourage customers to use electricity more efficiently there must be a sharp price differential between the cost of power during peak periods, when it is expensive to provide, and off-peak times, when generation and transmission costs are much lower.

SURCHARGES, DISCOUNTS

Many smart-metering advocates have focused on achieving this differential by raising peak power prices to encourage customers to cut their peak use as much as possible. Under dynamic and critical peak pricing schemes, peak power could cost up to ten times as much as off-peak prices.

But the prospect of swingeing price increases at peak times has run into fierce resistance from customers accustomed to paying a flat rate for unlimited power any time of day or night.

In particular, critical peak pricing has conjured up the nightmare of customers sweltering at home because they cannot afford to run the air-conditioning, and consumers dependant on home-dialysis machines being bankrupted by the utility.

U.S. utilities have had greater success in winning customer acceptance by offering rebates to building owners who volunteer to turn their air-conditioning down and reduce electrical consumption during power emergencies.

Centrica has extended this idea by offering heavily discounted or in some instances zero-price power at weekends to some customers in the Northeast United States and Texas.

Like critical peak pricing and rebates for cutting peak-time power use, free weekend power sharpens price differentials and encourages homeowners to shift as much consumption as possible to off-peak times.

Discounts will always be more popular than surcharges. By focusing on the potential for cheaper power at weekends, Centrica aims to reframe smart metering and pricing reform as a benefit to customers rather than a restriction on their right to use as much power as they want at any time for the same price.

COLD WINTER EVENINGS

In the United States, power demand peaks on summer afternoons, driven by air-conditioning in homes and offices. On July 19, as temperatures soared and power consumption hit record levels, suppliers in New York called on customers to conserve power and activated demand response programmes.

Participants in demand response are compensated for reducing electricity use, and could be penalized for not doing so, by raising air-conditioner thermostats and turning off unnecessary lights and other equipment, and operating on-site generators to cut the amount of power needed from the grid.

In Britain, air-conditioning is far less common, and more electricity is used for winter heating. Demand peaks between November and February on weekday evenings at around 1730 GMT, when most offices and factories are still open, but many residential customers have returned home, switched on the heating and lighting, and started to cook the evening meal.

So Britain's power suppliers need to persuade customers to curtail power use between 1600 and 2000 GMT in winter, and shift some of it to other periods, either later in the evening or at weekends, for example by postponing their use of power-hungry washing machines and clothes driers.

EFFICIENT NETWORK USE

It is extraordinary inefficient and expensive to supply the current heavily peaked profile of power consumption.

Generators and transmission operators must keep huge amounts of capacity on hand to meet peak demand that occurs on just a few hours each year. The rest of the time, generators and transmission lines are underused or idle.

Adding even more cost, generators and transmission operators maintain large amounts of spare capacity to provide a safety margin in case a major power station or transmission line is unavailable to meet peak demand.

Grid operators aim to keep the lights on even if the largest power plant on the network or the biggest single power line suddenly goes down (known as the n-1 criterion). In some areas, grid operators plan for the loss of the two largest generating or transmission assets (n-2).

The more peaked the consumption profile is, the more capacity is needed and n-1 or n-2 spare capacity must be held in reserve, all of which has to be paid for by consumers. The system could be operated much more efficiently and cheaply if the demand profile were less peaked and more even.

Variable pricing and load-shifting in electricity are based on the same principle as the load-management programmes and variable pricing employed by airlines as well as many railroads and metro systems.

WORKING WITH THE WIND

Smart meters and tariffs aim to flatten the demand profile as much as possible without compromising the quality of service offered to customers.

Smart tariffs should be cost-neutral for customers. Higher prices in peak periods should be offset by lower prices at other times. Centrica's chief executive did not say so, but "free power Saturdays" will be paid for by higher charges on weekdays.

Customers could even end up better off overall if smart pricing means fewer power plants and transmission lines need to be built.

Smart tariffs could also be greener tariffs. Wind turbines are expensive to install but cheap to run. The marginal cost of wind power is close to zero. By contrast, coal- and gas-fired power plants are much cheaper to build but costlier to run because the fuel must be paid for.

Grid operators call on generation in order of marginal cost. Wind farms are usually called ahead of gas- and coal-fired power producers.

In peak periods, even the most expensive generators come online, and the last to be called will be a fossil fuel plant. The more peak demand can be curbed, the more emissions can be avoided.

COMPLEX LOAD SHIFTING

Free or cheap power at weekends, offset by more expensive power during the week, is just one way in which utilities will try to encourage more load-shifting in future.

In an ideal world, utilities and grid operators want to be able to encourage load-shifting over a variety of timescales - from weekdays to weekends, from daytime to overnight, and even from one half-hour period to the next in response to a power emergency or a sudden drop in wind farm output.

In principle, smart meters can provide the price incentives and record-keeping to facilitate load-shifting over all these timescales, though they are most likely to be used to encourage weekday/weekend and day/night shifting.

Britain and the United States are also trialling a variety of other techniques to encourage customers to help balance the market and cope with power emergencies by curtailing demand at short notice.

In North America, PJM Interconnection has pioneered a capacity market that pays customers to help balance supply and demand. Britain's National Grid recently proposed a Demand-Side Balancing Reserve (DSBR) that will pay customers who cut consumption at peak periods during the winters of 2014/15 and 2015/16.

No one expects to pay a flat rate for a plane ticket any more. In ten years' time, the idea of charging for electricity at a flat rate will be seen as similarly old-fashioned.

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