Restructuring the Power Sector: Options for Reform
Main Options for Restructuring 4.2.4 Time of Use/Real Time Pricing Hong Kong could encourage the implementation of real time pricing and associated demand load management programs. With standard flat rate electricity pricing, consumers do not see any change in the price of electricity no matter how high or low the demand may be at any particular time. This further exaggerates the difference between peak and off-peak demand, resulting in unnecessary expansion of capacity as well as the use of economically and environmentally inefficient generation sources during times of peak usage. If customers were to pay more for electricity during peak hours, they would be incentivised to defer electricity use until off-peak hours begin. All else held constant, this would lower the absolute peak demand for electricity generally. A long term reduction in peak electricity consumption would lower overall industry capacity requirements, which are based on the need to supply sufficient electricity during peak demand. This would translate directly into the construction of fewer and smaller new power plants in the future than would otherwise be the case. The opportunity for load reduction and cost savings is greatest with commercial and industrial customers, for whom energy costs are a significant expense and the opportunities to shift electricity use or implement energy efficient technologies are greatest. For example, retail stores with freezers or refrigerators can temporarily raise the temperature during a spike in electricity demand. Similarly, a factory could temporarily shut down a production line or postpone the start of a batch job. Some utilities in the U.S. and elsewhere have implemented Time Of Use and/or Real Time Pricing systems on a trial basis with very positive results. For example, one utility implemented Time Of Use pricing for residential customers. Prices are 15% higher during peak times (6-10AM and 5-9PM), and 15% lower at off peak times (9PM-6AM). Customer satisfaction rates have been high, and utilities have seen overall load reductions of 5-15% and reductions in peak load demand as high as 50%. The benefits of real-time pricing at the retail level are widely distributed; while the individual responding to high price signals sees a reduction in electricity costs, that reduction is only 20% of the total savings. The remaining 80% of the savings is a result of the lower wholesale prices, which benefit all consumers.53 Implementation of Time Of Use or Real Time Pricing would require significant administrative work by the utilities, and installation of new 'smart' meters for all electricity consumers in the program. For maximum benefit, consumers would then need to modify their behaviour based on utility price signals.
Results
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Consumers will see different prices at different times and will adjust behaviour to save money Reduction in peak demand lowers both capital expenditures and operating expenses of utilities
Benefits
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Dis-benefits
Lower overall tariffs
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Price sensitive consumers can lower bills even further and enjoy increased control over their bills.
Increased administrative and equipment costs
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May be confusing for consumers
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Cost of re-educating customers may raise costs for utilities in the short-term
Likely reduction in pollution
McKinsey and Co, (2001), The Benefits of Demand Side Management and Dynamic Pricing Programs, May 1 2001, pp.5-7.