4) Smart and dumb appliances
I live in a rental. I’m not super excited about controlling the lights and climate in my house from my smart phone, and doing so is not realistic given I don’t own the split system. However, for the first time in my life I have occasionally used the timer features to delay the start or to turn off the split system. I also use the time delay feature on the washing machine and dishwasher.
My personal preference regarding “smart” appliances that automatically manage electricity use when taking into account my preferences and spot prices: I’d only consider it for temperature management. It is the biggest driver of electricity use in our leaky townhouse and we use it a lot (so there is some money at stake), plus it is pretty easy to think about what you want (give some temperature ranges, crank it at negative prices, turn things off overnight unless it is stinking hot).
I’m open to considering more automation as life and technology changes, but I just don’t feel the need to automate much more in my household at this point in my life. An obvious exception will be if we get an electric vehicle one day, then I’m definitely going to be having fun with its charging algorithm!
5) Hedging / insurance
I paid $0.22c/kWh under my previous plan, with certainty. Off-the-bat I know I’m going to need to pay less than that on average to feel like the RTP switch is justified since I am now taking on a lot more price risk.
In Australia, this is serious stuff, and would be for many households. In the wholesale market (the National Electricity Market, or NEM), prices can get as low as -$1000/MWh (-$1.00/kWh) and as high as $14,700/MWh ($14.70/kWh). This price ceiling is extremely high relative to the rest of the world.****** Carelessly leaving my A/C on the once in a blue-moon day when the wholesale market is extremely stressed and prices hit the ceiling might cost me $0.88 in an hour under my old plan and $58.80 under real-time pricing. Worse still, if there is a persistent and expensive summer on wholesale markets, I might be on the hook for prices much greater than what I'd face under my previous $0.22/kWh plan -- there are periods where I just have to use energy (A/C on a 40 degree day to keep the greyhound and the kids cool and out of the sun).
I have a strong academic interest in real-time pricing and want to experience it first hand. But I must admit that the prospect of getting smashed by wholesale prices and politely asking my wife to lay off the heater or the A/C really had me on the fence. In the end, a really crucial plan design made it easy for me to sign up: The plan offered by Amber has a $0.0055/kWh charge for hedging, whereby they insure customers at the regulated retail default offer. That is, if over 12 months my total expenditure exceeds what I would have paid under the default offer, they’ll cap my expenditure at the default offer cost. In 2020, this “Victorian Default Offer” was $1.0431 a day and $0.2787 per kWh – so a bit more pricey than my previous plan but adequate insurance all the same. Knowing what I know about the NEM, I would not have signed up for RTP without some form of hedging. This hedge might be the easiest for a retailer to communicate (“you won’t pay more than the VDO”) but to get a little wonkish, it isn’t ideal from an economic efficiency point of view. If you know you’ll blow past the VDO on an expensive year, then you will act like a flat rate customer and not respond to wholesale prices.
6) I’ve “saved” a lot of money (to date)
In the 4 bills I have received to date (3 months Spring, 1 month Summer) we have used 1604 kWh and paid $373.52. This is 35% less ($198 less) than what I would have paid under the Victorian default offer, and 21% less ($97 less) than what I would have paid under my old plan. Given that this has been a mild Summer, and wholesale prices have continued to remain much lower than usual for this time of year, I expect these savings won’t be clawed back over the remainder of the year.
These savings are meaningful but aren’t completely free. As mentioned earlier, we have taken on wholesale price risk – we’re comfortable with the risk, but there is always the chance we could end up paying more if wholesale prices increase -- we might only ever be one major transmission or generator event away from having prolonged high-price periods. We also pay more attention to daily electricity costs, so it is another thing on my mind. Further, our behaviour has changed to a small degree – perhaps my family would prefer that we never factored wholesale electricity prices into our use of the thermostat or appliances? Perhaps they would have preferred I talked less about electricity and more about Mighty Max King and the Saints?
7) Final observation for the National Electricity Market (NEM) wonks – 5 minute settlement
Boy oh boy, aligning settlement prices with dispatch prices is important for RTP customers. The NEM calculates dispatch prices every 5 minutes, but the ultimate price participants pay or get paid is a 30 minute price that is the average of the 6 five minute intervals. It can be nuts. It is not unusual to have 5-minute price series that look like $1100/MWh, $20, $20, $20, $20, $20, which results in a $200/MWh settlement for the half-hour. So I might get a price alert, turn my appliances off like crazy, and then crisis averted, the wholesale component of my charge eventually lands at $0.20/kWh. Thankfully I haven’t had a series like $20, $20, $20, $20, $20 (where I have consumed some energy for 25 minutes) and then $14,700 (where the 30 minute settlement price would be $2.50/kWh, applied to all my consumption in the 30 minute interval). It does seem pretty rotten that you can consume something and have the price set after the fact. But this will soon be a footnote in NEM history, with the implementation of a rule change to align dispatch and settlement at the 5 minute level scheduled for Q4 2021.
Closing thoughts:
So there you go, a dive into residential billing under real-time pricing in Victoria. For what it is worth, we’re happy and will stick with it, and we are very aware that the savings might be temporary. But it really hasn’t felt like a big deal so far. The hedging is not necessarily how I’d have drawn it up, but it did help me sign up and sleep at night. Wearing my academic economist hat, it has been a great experience to date and is helping to keep me up to speed with market outcomes and some market design and forecasting quirks in the NEM.
Finally, a quick plug for a related working paper I have just released. We take a first pass at trying to understand which households consume energy at high- and low- wholesale price times, which could inform who would benefit from real-time pricing in Victoria. Link and abstract below.
Cheers!
Identifying consumption profiles and implicit cross-subsidies under fixed-rate electricity tariffs
w/ Armin Pourkhanali and Guillaume Roger
Abstract:
Wholesale electricity prices can rapidly change in real-time, yet households usually face fixed-price electricity tariffs. Therefore, households that predominantly use energy when wholesale prices are low implicitly cross-subsidize households whose energy use is more weighted to high-price periods. We develop a decomposition method that maps substation data on electricity use to demographic data, identifying the household characteristics associated with this cross-subsidization in Victoria, Australia. We find that households in areas with low house prices and high levels of renters and elderly residents are the net funders of this implicit subsidy. These households currently have the lowest average energy cost for retailers to service, and may be the greatest immediate beneficiaries if real-time retail tariffs are made available to them. Finally, we present evidence that cross-subsidy magnitudes have been growing in recent years, coincident with rapid solar generator penetration.
*: When ignoring the 11am spike in Summer, likely driven by hitting the $14,700/MWh price ceiling at some point in Summer at 11am.
**: “All” households is a little strong. 93% installed by December 2013, 99% by June 2014. https://www.audit.vic.gov.au/sites/default/files/20150916-Smart-Meters.pdf
***: There were a handful of plans that had time-of-use pricing. These had one price for electricity used in “peak” hours of day (eg 7am-8pm) and another rate for off-peak. However, these plans were not very competitive when compared with the flat-rate plans, with the peak price often being much greater than the flat-rate and the off-peak only being marginally lower.
****: A plug for a paper of mine where we educate residential customers in Puebla, Mexico about the private costs of variously electricity-using actions. Increasing the Energy Cognizance of Electricity Consumers in Mexico: Results From a Field Experiment. Published in JEEM, ungated working paper link here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3220111
*****: My understanding is that the environmental costs are the costs of Renewable Energy Certificates that are the mechanism behind achieving Renewable Energy Targets.
******: A high price ceiling is not inherently “bad” – for further information refer to the well-trodden discussion on what is known as “resource adequacy” mechanisms in wholesale markets.