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Dynamic Pricing

October 18, 2011

The ability to price electricity based on its cost, which varies during the 24-hour day, is projected to be a major benefit of smart meters.

Customers would be charged a higher price during peak periods when electricity costs the most to produce, and lower prices during off-peak hours when it costs less to generate electricity.

The supposed benefits of dynamic pricing are to discourage usage during periods of peak demand and encourage usage at night when demand is much lower.

Theoretically, this would cut peak loads and save utilities the cost of building new power plants.

It would also prepare utilities for the day when plug-in electric vehicles (PHEVs) and electric vehicles (EVs) will be ubiquitous, since it encourages their owners to recharge batteries at night.

While this concept has considerable appeal, especially if PHEVs and EVs are ever widely used, there is the issue of how high prices should be set during the daytime hours, especially during hot summer days.

While few mention the possibility that electric rates for peak periods could be as high as 40 cents per kilowatt hour, four or more times current rates, such a rate could readily reflect the actual cost of generating electricity during peak periods.

Many people already find the cost of air-conditioning to be a burden. Imagine the impact if the cost of running air-conditioning units was four times greater than today.

There are other means for getting owners of PHEVs and EVs to only charge their vehicles at night. One is to equip home-charging systems with timing devices that prevent charging during the day.

The proponents of smart meters rarely mention the issues surrounding dynamic pricing.

What should be the maximum rate?

Should rate schedules be based on income? Should rate schedules be based on a person’s age? Or a combination of these?

Are smart meters a means for social engineering or for efficiently managing the grid?

If smart meters are used to force people to do their laundry at midnight or to limit the amount of air-conditioning people use, they are a means for social engineering.

If, on the other hand, they are used to identify the cause and location of outages or for determining transformer loads, they are being used to manage the grid more efficiently.

Utilities can benefit from smart meters and they should pay for their installation. How smart meters affect consumers is an issue for regulators and government.

Dynamic pricing needs more transparency, analysis and discussion.

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