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Transactive energy pilot to test customer acceptance of real-time pricing scheme

By K Kaufmann

Editor’s note: This article has been updated with additional information from Edward Cazalet and the California Energy Commission.

Earlier this year, Edward Cazalet, CEO of TeMix Inc., submitted a paper for the Smart Electric Power Alliance’s (SEPA) 51st State Initiative, envisioning a “transactive” energy system that used real-time, wholesale electricity prices to help people save money by shifting their energy use.

The automated system the paper proposed would “use power when it’s cheap and shift away from it when it’s expensive,” Cazalet said. “The customer, if he (sic) cares, can know what it will cost to run his electric dryer now, or his electric dryer will know the cost of running, and it will tell him if he waits an hour, whether it’s more or less expensive to run. The customer can make that choice, or the electric dryer can make that choice for him.”

Ed Cazalet speaks at SEPA’s 51st State Summit in April in Denver.

A small group of consumers in Southern California may soon have a chance to test out Cazalet’s ideas via a pilot project funded with a grant of close to $3.2 million from the California Energy Commission. Cazalet talked about the grant and the pilot July 11, during a workshop at SEPA’s National Town Meeting on Demand Response and Smart Grid in Washington, D.C.

Read Cazalet’s 51st State paper here.

The pilot will hook 200 volunteer customers into a transactive energy platform that Cazalet will develop with his project partner, Universal Devices Inc. (UDI), a California-based company, that designs and markets energy management systems for homes and businesses. Individual volunteers, located in Southern California Edison’s service territory, will be provided with UDI systems that will monitor their heating and cooling, electric water heaters, pool pumps and other devices.

That system will be paired with what Cazalet describes as a “two-way subscription tariff” designed to provide customers with both predictable, fixed monthly bills and real-time price signals that will pay them for saving energy and charge them extra for above-average use.

“The purpose of the pilot is to show the technology works and to learn how the customers can work with it and how the customers might benefit,” he said. “The other side for (utilities) is to learn how to develop the prices that make business sense to them and reflect the true cost of power.”

The bigger picture, for California and the energy industry in general, is to find ways to reshape how and when people use energy — a key challenge utilities and regulators now face as more renewable energy and other distributed technologies come on the grid. For example, mid-day overproduction of solar in California and Hawaii — both states with high amounts of solar on the grid — can result in negative power prices or the need to curtail production at certain projects.

Cazalet’s grant is one of eight the California Energy Commission recently announced as part of a research initiative to step up the role of demand response — and load management in general — on the grid, with a special focus on residential customers. Michael Gravely, the commission’s deputy division chief of energy research and development, believes the real-time price signals Cazalet’s pilot will be testing could be used to build demand response as a more predictable and reliable resource than it is now.

The goal, Gravely said, is “to understand how do you tap this resource that is by far the most cost-effective way to integrate renewables and provide grid-critical services. Today we do things like flex alerts; we plan a day ahead. We want to be able to use (demand response) either seconds or minutes ahead so it becomes a much more valuable resource for managing the grid.”

Building demand response as that kind of fine-tuned resource may ultimately depend on customers’ willingness to embrace the more complex technology that pilots such as Cazalet’s are developing — and the more complex rate designs that go with them.

Bill LeBlanc of E Source, a Colorado firm that consults with utilities on customer engagement strategies, is skeptical. Cazalet’s pilot, he said, is “leap-frogging” over other incremental steps that may be needed for energy market evolution.

He believes the industry is still 10-15 years away from the widespread adoption of “smart” technologies that will allow for the kind of transactive energy platforms Cazalet is proposing. Plus, he said, customers in general are wary of any technology they perceive as giving utilities control over their energy use, regardless of whether it does or not.

“They want simplicity,” he said. “But they’re not willing to save money if the utility is going to control their thermostat.”

Cazalet stresses that the pilot will not involve any utility control of customer thermostats or other devices.

Real-time energy prices without the wholesale market hassles

Ed Cazalet has spent the past few decades trying to design better, more efficient energy markets — as CEO of APX, a pioneer in green power and carbon markets, and later as a governor and interim CEO of the California Independent System Operator, the state’s nonprofit grid manager.

The impetus for the transactive energy pilot lies in his belief that energy markets should run like other retail markets, where people can make purchasing decisions based on real-time information.

“In other words, if you go to the grocery store and you want to make a salad and you see the price of tomatoes is really high, maybe you’ll buy avocados,” he said.

The two-way subscription rates in the transactive energy pilot are intended to provide consumers with such real-time price signals, while also ensuring revenue stability for utilities.

Individual volunteers in the pilot will be put on a subscription contract under which they will buy fixed hourly amounts of electricity for each hour of the month — based on past hourly consumption for the previous year. They will then be charged a set monthly bill amount based on their current rates. Monthly bills will still vary with differences in seasonal use.

The potential for savings will come if, for any one hour, customers use less power than the set amount. In that case, they will receive a credit tied to spot prices on the wholesale power market at that time — which, depending on the time of day, could be high or low. For example, cutting use at times of peak demand, when spot market prices can spike, could mean a big credit.

Find out how one California utility is hoping to harnass customer adoption of distributed technologies here.

On the other hand, any hour customers use more power than set in their subscription, they will have to pay extra, again based on the spot market price.

“If you’re going to use more power, you want to use it when power is cheaper,” Cazalet said.

The credits and extra charges will be netted on a monthly basis and figured into the set monthly charge, he said.

Cazalet said that the two-way subscription rate does not mean individual customers are bidding or selling into wholesale markets. It is, he said, the opposite.

“They’re getting a price that says, today the wholesale market will give me power at this price and I’ll buy it or I’ll sell back what I already purchased,” he said. “This overcomes the major barrier to distributed resources or demand response, where you have to bid into a complicated market designed for big power plants. We’re going to turn this around and have the wholesale market tell us what it’s worth, and we or our devices decide whether we’re buyers or sellers.”

Cazalet is less clear on exactly how individual customers in the pilot will get this pricing information, though he said the plan is for the technology to be as transparent and easy to use as possible.

The UDI systems to be used for the project are open source devices that can work with a range of smart home appliances and can be managed via a cell phone app, according to Orly Hasidim, UDI’s project manager.

Cazalet will design the software for the transactive energy platform that will provide the real time price signals, possibly using some kind of a mobile interface to communicate with customers, he said. Eventually, he believes smart appliances will either be able to “learn” their owners’ preferences and use patterns — as some already do — or they will include built-in displays that allow customers to set consumption options for savings, convenience or comfort.

“When you press to start (a dryer or other appliance), it will say ‘25 cents to do the job,’ and next to it is another button — ‘Wait one hour’ — and it says ‘5 cents, make a choice,” he said.

Cazalet also believes that this pricing scheme will encourage customer investments in other devices and distributed technologies that will further optimize efficient use of power and savings.

Similarly, the subscription pricing will provide utilities with stable revenue allowing investments in more efficient, resilient distribution systems and other clean technology.

Overcoming customer perceptions of utility control

Just how feasible is all this, and will customers buy into the pilot? Cazalet said planning for the pilot is just beginning, with many details still to be worked out. Southern California Edison provided a letter of support for the grant, but at this point has no direct role in the pilot, and Cazalet does not expect volunteer recruitment to begin for at least another six months.

Meanwhile, opinions on the project among researchers and consultants at the National Town Meeting ranged from LeBlanc’s skepticism to more guarded enthusiasm, mixed in with a few caveats.

Jennifer Potter is a senior scientific engineering associate at the Lawrence Berkeley National Laboratory, where she has worked on research about customer propensity to adopt new technologies. She believes getting volunteers for Cazalet’s small pilot should not be overly difficult.

“You have a population of customers we call the ‘always takers,’” she said, who make up about 10 percent to 20 percent of the customer base. “They are engaged with the utility; they want to try new things; they are the ideal customers for pilots.”

And she said, while the majority of utility customers may still pay minimal attention to their electricity bills, “they are paying attention to energy. That is a whole new concept we have to get our hands around. How is it we’re adding value for energy — not just how we charge. These technologies — solar and electric vehicles and smart thermostats — these are the things that are coming into the market and shaping how consumers do energy.”

Check out another SEPAPower blog on how utilities are changing the way they communicate with customers here. 

Michael Coddington, a principal electrical engineer at the National Renewable Energy Laboratory — and self-confessed “always taker” — was intrigued by the possibility of customers being able to take advantage of spot market electricity prices. But, he said, the technology would really have to be simple to gain consumer buy-in.

Most customers “are happy to modify their behavior a certain amount; they don’t want to watch a computer screen,” he said.

Potter added that pilot enrollment will need to be streamlined. The more appointments customers have to schedule to enroll in a program or have equipment installed in their homes, the more likely they are to drop out, she said.

Coddington and Potter also agreed with LeBlanc that overcoming any customer perception of utility control of smart devices will be a major challenge — and require a shift in customer thinking as well as behavior.

“There are some customers that are just going to say, ‘I don’t understand it; I don’t want the utility to control it,’” Potter said. “That’s how they are going to perceive it, instead of — this is automated; it’s not going to impact you. It’s just allowing market forces and trends to optimize your energy use so you come out on top.”

Cazalet acknowledges the criticisms, admitting that the kind of transactive energy system he is proposing may not be for everyone.

But, he said, “That’s the purpose of the pilot — to answer those questions. We don’t have to debate is this a great idea until we get the information.”

He believes the pilot will appeal to a range of customers — those with solar and storage, those with high electric bills — and he’s thinking big.

“We’re setting up the pilot to scale to millions of customers, billions of devices,” he said. “The platform is in the cloud; it could be installed anywhere in the world with a few mouse clicks. This isn’t a technology problem. It’s a question of mindshare.”

K Kaufmann is SEPA’s communications manager. She can be reached at [email protected].