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Are you interested in looking up the daily wholesale prices of electricity and using that information to decide when and how long you’ll run the air conditioning or the gas dryer? Ready or not, variable pricing is about to invade your home.
The trend towards variable pricing is becoming more pronounced. Variable pricing, or pricing based on supply and demand, seasonality, or other events is changing the way airline and ballpark seats are sold, and is even transforming decades old “cost plus” pricing models in the manufacturing industry. But let’s not stop there; according to a recent Wall Street Journal article, “Letting the Power Company Control Your AC,” variable pricing is about to invade the home.
The article discusses how utility companies across the United States are experimenting with variable pricing models to moderate energy consumption. Pricing for gas and electricity can now be based on time of day and amount of energy used. In an effort to encourage homeowners and businesses to conserve energy, the article notes, “utilities are putting sophisticated tools in consumers' hands, such as online calculators, advanced electric meters, in-home displays, remote-control devices and innovative pricing plans.”
For some utilities, flat-rate pricing is out and variable pricing is in. The article mentions how consumers can now check a website for daily electricity rates and use that information to make energy choices. “Just giving people information has an impact on how they use energy,” says Dana Yeganian, a spokeswoman for Progress Energy in Raleigh North Carolina.
A key to the adoption of variable pricing is to ensure pricing information is easily accessible and available. It also helps to provide incentives and education to encourage a change in behavior. For example the article notes, "On a late June day, with temperatures in the mid-90s, power prices were expected to range from a low of 4 cents a kilowatt hour at 3 a.m. to a high of 10 cents by 4 p.m." The article mentions how a consumer used this information to make a choice to run her dishwasher at night and not be so quick to turn on the air conditioning.
Some states are requiring utilities to adopt variable pricing models. The article highlights a new Illinois law requiring utilities to, “offer real-time pricing programs so consumers have an incentive to shift their energy use away from the costliest periods. Over time, (the law) should reduce overall power costs by tapping the most expensive generating (power) plants less.”
In the utility market, variable pricing seems to make sense to help control energy consumption. However, in this example, the implementation of variable pricing also means more consumer choices abound, and therefore marketing dollars will need to be spent on consumer education and awareness.
Consumers will need to understand the financial impact of their decisions. If I run my air conditioning at 78 degrees instead of 76 degrees, how much money will take save me per month? Is the benefit significant or negligible?
Utility companies also realize there will be resistance (overt and covert) during the switch to variable pricing. Consumers are already overwhelmed with choice, and adding more choice to the mix means another aspect of life that must be “managed”.
There’s also the potential for customer service nightmares. Utilities that neglect to invest the proper amount of money to educate and inform consumers about variable pricing options might find themselves deluged with irate customers with outrageous utility bills at month's end.
As the utility examples show, variable pricing isn’t just for improving profitability and maximizing revenues—it can be used to actually minimize consumption of scarce and costly resources
With more industries using technologies such as data warehousing and analytics to implement variable pricing models and programs, I’d like to ask—are you prepared for the shift to variable pricing?
When your utility company adopts variable pricing, will it change the way you consume energy?
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Comments
Paul - this concept has been around for decades. I was a utility industry consultant in the mid '90s and variable pricing was widely employed by commercial and industrial users, and available to residential accounts.
One problem which persists today is that the cost of energy for many people is not high enough to force a change in behavior. Another is our critical reliance on power - few people live in little houses on the prairie anymore.
Your customer service nightmare has already occured - reference California late 90's, Enron...
For the sake of future generations I'd hope that things could change, but based on recent history this seems highly unlikely. I won't even start to get into the Syriana/Inconvenient Truth aspects of where this discussion could lead!
Posted by: Pete | 07.12.07
Pete, thanks for your perspective as a former utility consultant. I think as energy costs go higher and supplies globally are constrained, all utilities will be forced to adopt variable pricing models to help moderate consumption.
Overall, I believe the concept of variable pricing, will become more prevalent in daily life.
Posted by: Paul Barsch | 07.12.07
Paul,
I also worked for a utility from 1992-96, and we, too, employed variable pricing. And for those of us who live on the East Coast and heat with oil, well let me just say, the marketplace has not been kind.
Posted by: Lewis Green | 07.12.07
Paul,
Good post. I believe you're right in your assessment that variable pricing will become much more prevalent and give consumers more options going forward. Look at what online sites like Expedia.com have done for the travel and hospitality businesses. Now insurance companies and banks are increasingly bundling various groups of services together that are more customized to consumer needs and save them money, as well. I do believe also, that consumer demand is pushing these trends forward. Thanks for posting this, Paul.
Posted by: Ted Mininni | 07.12.07
Hi Paul,
As a Connecticut resident, I can tell you we pay among the highest utility rates in the nation. While CT Light & Power regularly runs TV ad spots suggesting customers use their major appliances during peak energy usage days during off hours, ie, early in the morning or after 8:00 PM at night, I am not aware of any push on their part to share any potential rate differences if we comply with this. Maybe I need to check out their web site to see if variable rates apply to us. Doubtful, though. On top of the 25% rate increases in electricity this past year, CL&P is seeking another 5% increase now. Not good for us--and believe me when I say we conserve as much as humanly possible.
Posted by: Claire Ratushny | 07.12.07
Lewis and Ted, thanks for your comments. Ted, I'm not convinced consumer demand is driving variable pricing. I think it's more companies trying to maximize their profits--which they should be doing. Variable pricing, in my mind, makes things more complicated and possibly frustrating for the consumer or business customer.
In this utility example, my brain is already stretched with work and life, do I really want to go to a website every morning to discern the prices of energy that day, and then decide how high to run my AC? Ugh.
Posted by: Paul Barsch | 07.12.07
In many product and service sectors, variable pricing and customized packages are being driven by consumer demand. Companies that provide these services use them as powerful differentiators from competitors. Intense competition as well as consumer demand are driving much of this.
When speaking of utilities, many operate as monopolies--so competition isn't the issue for them. And since many have had consistent rate increases, consumers probably don't think they have the option to seek lower rates if they switch most of their usage to off-peak hours. Even if they do, it's a pain for them to stay on top of this, as you point out. There has to be a better way. . .
Posted by: Ted Mininni | 07.12.07
Paul, I requested a "time of use electric meter " from my electric company. I had to alter my lifestyle only a bit Iuse all the large appliances after 9pm or before 10 am or on weekends and pay a lower rate p/kwh. The delivery rates are the problem they do not change. I wounder if people were able to pick the way there electricity was made would this have any benificial impacts on spuring new technologies?
Posted by: john suliban | 07.12.07
John, thank you for commenting. For me, I really would need to know how much money I am saving by running my appliances at night vs peak hours. I am all for energy conservation and sharing for the common good, but if all my extra effort ends up saving me $5--that's not worth the extra time or hassle.
The marketers are going to have to much more than educate me about variable pricing, they are going to have to use "price" to change my behavior.
Posted by: Paul Barsch | 07.12.07
One form this is likely to take is variable pricing within the service area. More affluent zipcodes will get charged more. Gas stations, grocers and even Walmart are doing this already.
Posted by: Mary | 07.18.07
To me this is a social issue. The less advantaged people with out AC are subsidizing people to use AC during peak time. The way the expense of peak power is spread out to all rate payers just is not fair.
Posted by: Dave | 07.24.07