Ahmad Faruqui,
Principal, The
Brattle Group
 
London, U.K. --- (METERING.COM) --- October 14, 2009  - The adoption of dynamic tariffs could make or break the pay-off from the European Union’s investment in smart meters, with the potential to provide savings up to €53 billion over the next twenty years, according to a new discussion paper from the Brattle Group.

With operational savings from easier meter reading and other measures estimated at €26 billion to €41 billion, there is a “savings gap” of €10 billion to €25 billion between the benefits and the estimated €51 billion costs. With an uptake of dynamic tariffs of only 20 percent, i.e. similar to levels seen for other TOU tariffs in liberalised markets, the savings are only €14 billion. However, If 80 percent of customers reduce their demand at peak hours due to dynamic pricing, the reduction in associated capacity and transmission costs would be €67 billion.

This €53 billion difference is the reward that awaits policy makers if they can persuade customers to sign on to dynamic tariffs in greater numbers, say Brattle economists Ahmad Faruqui, Dan Harris and Ryan Hledik, who authored the paper.

The paper says that policy makers in Europe have to date focused on rolling out smart meters, but the issue of ensuring that suppliers offer and customers accept smart tariffs has received relatively little attention. However, how much will be saved through dynamic pricing will depend principally on how rapidly suppliers offer tariffs that provide dynamic price signals to customers, and how well customers respond to the price signals.

The paper identifies a number of barriers to customers choosing dynamic tariffs, including insufficient financial incentives, difficulty in estimating the benefits of switching to a dynamic tariff, risk aversion and uncertainty about how to respond to dynamic prices. Thus both policy makers and energy suppliers need to be innovative in order to overcome these barriers. Quantifying and stressing the environmental benefits of dynamic tariffs, ensuring transparent and adequate financial rewards and offering customers a lower flat tariff in return for providing “automatic” demand response could help boost customer participation.

For some member states, setting a dynamic regulated tariff could significantly increase demand response. Countries without regulated tariffs could implement dynamic transmission and distribution tariffs that would vary according to when the customer uses power.

“The EU has made bold steps in beginning to roll out smart meters. It should capitalize on this investment and take steps to ensure that customers embrace smart prices, as the savings could be substantial,” commented lead author Faruqui.

The benefits of a reduction in demand during critical periods that are considered in the paper are a reduction in the need to install peaking generation capacity, the avoided energy costs that are associated with the reduced peak load, and the reduction in transmission and distribution capacity.