The road to real-time pricing
The electric grid is rapidly evolving, with increasing loads and a growing infrastructure. Renewable energy growth and the rise of distributed energy resources (DERs) have transformed what was once a one-way system into a dynamic network of energy exchanges. Demand is also rising due to electrification efforts, including electric vehicles (EVs) and heat pumps, as well as increased energy needs from manufacturing and data centers. As stated in recent CEO blog by Rich McBee, electric utilities have nearly doubled their forecasts for additional power needed by 2028, after remaining relatively flat for the last 20 years.
With the challenge of meeting rapid growth compounded by growing shares of variable generation sources and more frequent extreme weather events, the risks to reliability and affordability are real. Real-time pricing may be the answer.
Real-time pricing (RTP) seeks to mitigate cost and reliability risks by passing through actual supply costs to consumers. Although the concept is not a new one, and it currently sees low rates of adoption in the U.S, we predict utilities will increasingly see the value in RTP and expand its deployment over the next five to ten years. To support this expansion in RTP, utilities should begin preparing customers for the transition now.
Why real-time pricing?
RTP brings many benefits, helping both utilities and their customers optimize energy use in ways that lower costs, reduce grid stress and promote alternative energy solutions:
- Reduced grid peaks and lower costs: RTP sets higher prices for energy from costly sources, such as gas peaker plants, during high-demand times. By shifting usage to times when energy is less expensive, and to when more sustainable energy sources are available, customers can help lower system peaks and reduce generation and transmission costs.
- Daily demand smoothing: Fluctuations in energy demand over the course of a day require adjusting generation to match this demand, and at certain times these increases and decreases can be quite dramatic. For example, the infamous “duck curve” shows a rapid ramp up in net energy demand in the late afternoon as solar generation decreases while customers turn on lights and home appliances. By encouraging load shifting, RTP can help smooth out demand curves, reducing the need for rapid increases and decreases in energy production.
- Environmental impact: Renewable energy sources such as wind and solar have lower levelized costs of energy compared to higher-emission sources. By reflecting these lower costs at times when energy from these sources is abundant, RTP encourages customers to shift more of their consumption towards these sustainable and cost-effective energy options.
Considerations and challenges
When implementing RTP, utilities, regulators and customers must be aware of the following:
- Technology readiness: Real-time pricing depends on accurate tracking of supply, generation and consumption. Utilities need advanced technologies, like smart meters and robust data infrastructure, to support this. Although smart meter adoption is increasing, deploying them widely is a significant investment. Utilities can build regulator support by demonstrating RTP’s clear benefits to customers, including opportunity for future RTP and showing how technology and infrastructure investments enable RTP-driven optimization.
- Regulatory collaboration: Regulators are tasked with protecting customers and ensuring affordability. Utilities should work with regulators to show how RTP benefits ratepayers. Offering incentives to utilities, beyond just cost recovery, can make RTP adoption more attractive by compensating for the reduced need for traditional capital investment.
- Customer understanding and trust: Educating customers on how RTP works, how it benefits them, and how it can lower costs through optimized energy use is crucial. Clear, transparent communication will build customer trust and help prevent misunderstandings about more complex rate structures.
- Timeline for transition: Shifting to RTP could take five to ten years, as each new rate structure needs at least a year for impact assessment. Any required technology deployment will further extend this timeline.
- Supporting all customer segments: RTP must be designed equitably. While some customers can shift their energy use, others with rigid schedules might not have this flexibility. Targeted programs can help ensure RTP works for all customers, including low-income households and those with limited ability to shift load.
- Cost control mechanisms: To protect customers from price volatility, utilities could implement cost caps or rate designs with regulatory oversight. These measures ensure vulnerable customers are shielded from excessive price swings while still attaining the bulk of the benefits that uncapped RTP has to offer.
The role of automation and smart devices
If a world where customers are constantly watching price signals and frantically running around turning devices on and off is not your idea of energy utopia, don’t fear. That’s not how RTP will work. Effective RTP needs to be implemented by pre-configured responses programmed into the energy-using equipment. As RTP scales, automated controls and smart devices will become essential for managing complex rates. Automated systems can optimize energy use on behalf of customers, adjusting usage in response to price signals without requiring their direct input.
As connected devices allow third parties to better manage energy loads across households, neighborhoods or even cities, they can provide collective benefits and maximize grid flexibility. While there still exists a technology-readiness barrier for integration of smart devices onto the grid, this connectivity will be a key piece of the RTP optimization puzzle. As technology improves, opportunities for the use of smart devices will expand.
The California Energy Commission (CEC) is paving the way for smart devices to enable RTP with the Market Informed Demand Automation Server (MIDAS). MIDAS provides access to the time-varying rates of utilities and tracks greenhouse gas emission signals. Solutions like MIDAS need buy-in and investments from manufacturers to scale, which can be encouraged through utility support for emerging technology studies and pilots.
The roadmap to real-time pricing
Guiding customers along the RTP journey could take several steps, from simple flat-rate structures to more dynamic pricing:
| Type of pricing | Description |
| Flat rate | A fixed price per unit of energy, regardless of the time of day. |
| Peak time rebate (PTR) programs | Voluntary programs that reward customers for reducing energy use during peak times. PTR programs are event-based and do not necessarily come before TOU rates. |
| Time-of-use (TOU) rates | Rates vary between on- and off-peak periods, with a pre-defined schedule. TOU rates are an average. |
| Variable peak pricing (VPP) | This is similar to TOU, but with flexible peak periods based on anticipated demand. |
| Real-time pricing (RTP) | Rates reflect real-time grid conditions, varying throughout the day to reflect supply and demand. |
The steps along this road are not always linear, and in some cases, customers have several of these steps available to them at the same time.
As customers move through these stages, automated controls and connected devices will make managing energy easier, helping to drive adoption.
Key takeaways
The path to real-time pricing offers immense potential for reducing costs, supporting clean energy, and enhancing grid stability. By taking a measured approach and prioritizing customer education, utilities can guide their customers through the transition.
CLEAResult is ready to support utilities at every step, helping build the trust, knowledge and tools needed for a smooth shift to RTP.
We can help with:
- Customer segmentation and analytics: We help utilities tailor demand management programs for different customer segments, ensuring equitable and effective implementation.
- Program design: CLEAResult has expertise in demand response and managed charging programs that lay the groundwork for RTP.
- Customer support and outreach: Our connected device marketplace, marketing and education programs support customer engagement and understanding.
- Measuring impacts: Gaining insight on load impacts and customer experience from pilots and early pricing programs will inform and shape the path forward.
Learn more about what our Energy Transition specialists can offer on our website.
Michael O’Brien Crayne is Senior Practice Consulting Manager in CLEAResult’s Energy Transition practice in the U.S. East and Canada regions, designing, evolving and growing the impact achieved by electrification and distributed energy resource products and services.