Meeting electric peak on the demand side: Wholesale and retail market impacts of real-time pricing and peak load management policy

Traditionally, the participation of customers in the electric market has been weak or non-existent. Almost all customers have paid a flat rate for power without variations based on the time of their consumption, so these customers have had no incentive to reduce their usage during times of capacity shortage and very high wholesale prices. Perhaps even more importantly, customers have not participated in forward decisions about whether it would be better to build additional capacity at very high cost or to commit to peak load reductions during a few peak hours each year. In this thesis I present the status of efforts to incorporate customer decisions into the electric market place and calculate the possible system benefits.;In Part I I discuss recent activities relating to demand response and demand-side management. Although interest in demand response is growing among policy-makers and industry participants, the process of making this possible will be a complicated navigation among the incentives of involved parties and the jurisdictions of state and federal regulators. One of the key problems in developing a coordinated policy is that the wholesale markets covering generation and transmission are under the jurisdiction of the federal government represented by the Federal Energy Regulatory Commission while electric distribution and retail markets are under the jurisdiction of the state, represented by state public utility commissions (PUC).;In Part II I investigate the value to the system of reducing peak demand and compare this value to the current costs of peak load reductions. Peak load reductions are currently being achieved at ;I further investigate the value to the system of shifting the burden of uncertainty in peak load on to customers and the utilities acting on their behalves who have the most ability to determine what peak load will be. The traditional means of accounting for uncertainty in peak load has been to build enough excess capacity that the chance of shortages is low. I calculate that a right-sizing peak capacity to the best estimate of peak load would reduce the amount cost of supplying capacity by 8.5% below the current level.;In Part III I investigate the short-run economic impacts of a policy change from flat-rate retail electric pricing to real-time prices (RTP) or time-of-use (TOU) prices. If retail prices reflected hourly wholesale market prices, customers would shift consumption away from peak hours and installed capacity could drop. I use hourly price and load data from Pennsylvania-New Jersey-Maryland Regional Transmission Organization (RTO) to estimate consumer and producer savings from a change toward RTP or TOU. Surprisingly, neither RTP nor TOU has much effect on average price under plausible short-term consumer responses. Consumer plus producer surplus rises 2.8%-4.4% with RTP and 0.6%-1.0% with TOU. Peak capacity savings are seven times larger with RTP. Peak load drops by 10.4%-17.7% with RTP and only l.1%-2.4% with TOU. Half of all possible customer savings from load shifting are obtained by shifting only 1.7% of all MWh to another time of day, indicating that only the largest customers need be responsive to get the majority of the short-run savings.;Placing customers on an RTP can benefit them through lower average rates for energy and capacity, but the advanced metering infrastructure (AMI) required to make RTP and customer response possible is a large investment. In Part IV I determine how many customers can be cost-effectively placed on RTP from the perspective of a PUC. I calculate that for wide scale implementation of AMI, all customers above 2.5 kW in coincident peak load (about 40% of all customers, representing all industrial, all commercial, and large residential customers) could be cost-effectively placed on RTP if there are no benefits to the AMI other than demand response from RTP. For the customers below size 0.31-0.73 kW (the smallest 10%-20% of customers, representing small residential loads), installing an AMI is not cost effective even under the most favorable assumptions about other AMI benefits and highly responsive customers. For intermediate-size customers the investment would be justified in some cases but not others.