Switch that can lower electric bills

As grid planners work to ensure that Texas can generate enough electricity when people use it most, electric companies are helping — and potentially profiting — by rewarding customers who use power when demand is lower.

Retailers are offering what they call time-of-use programs aimed at encouraging customers to curb their power use from 3 p.m. to 7 p.m. on weekdays, when demand typically peaks.

The programs, available in most of the state, charge customers a slightly higher rate for weekday use, but include such goodies as free electricity at night and on weekends, and financial incentives for limiting electricity use during peak times.

“What we find is that they move a lot of their power demand, so that they can benefit from free power,” said Steven Murray, president of Direct Energy’s residential retail line, which offers a free Saturday program. “If everyone were making these choices, it would eliminate the need for many new power plants.”

It also can help retailers’ bottom lines, as they pay lower wholesale prices for electricity during periods when demand is lower.

Electricity is a commodity, but it can’t be stored like beans or gasoline; it has to be generated as it’s used. Meeting peak demand requires having, or building, enough power plants to generate electricity when demand is highest, even though it seldom reaches that level.

“The problem is, you have massive unused capacity at either side of that period, and everyone has to pay a return for that to the generators,” Murray said.

The market provides that return by paying more for power from generators that don’t run all the time.

When demand peaks and those plants fire up, the state grid operator allows the wholesale price to climb as high as $4,500 per megawatt-hour. That cap will rise to $7,000 per megawatt-hour next year and $9,000 in 2015 – far higher than the wholesale price during normal demand conditions, which usually is under $100 per megawatt-hour.

The Electric Reliability Council of Texas monitors and operates much of the state’s electric grid from this Austin control center. When usage peaks, generators that don’t usually run are fired up and electric providers pay a premium for that energy. Time-of-use programs are an attempt to smooth out sudden surges in demand.

Spot market price

Residential customers typically pay a set price per kilowatt hour for whatever power they use. The retailers that provide it, however, buy big blocks of electricity from generators. They contract in advance for much of it to hedge their risk, but some power also trades on a spot market where price fluctuates every 15 minutes.

Retailers hope time-of-use programs will increase the margin between what they pay for power and what they earn selling it, by encouraging their customers to use power at times when wholesale prices are lower.

“The reason retailers are telling you to curb power from 3 p.m. to 6 p.m. is that it is the most expensive time for them to have to go out and buy energy,” said Michael Harris, CEO of Unified Energy Services, an electricity consulting firm, and president of the Electricity Professionals Association.

If customers demand more power than a retailer has committed to buy, the retailer has to pay top-dollar on the spot market at peak hours, Harris said. But retailers with excess power at peak times can sell it profitably to other retailers.

Time-of-use programs also provide retailers with a marketing tool.

“In a competitive market, we have to fight to win the hearts and minds of customers,” said Elizabeth Killinger, president of retailer Reliant Energy. She said 20 percent more customers who participate in its time-of-use and other savings programs stay with Reliant than those who don’t participate.

“Having access to this new technology helps us create products that are right for them and will help them.”
Reliant declined to disclose how many customers participate in time-of-use programs.

How much electricity customers can shift – and how many customers are doing so – is still an open question, but grid managers say that overall actual peak demand has fallen below what had been forecast.

The highest so far this summer was 67,180 megawatts on Aug. 7. Despite projections that demand might top the record of 68,305 megawatts on Aug. 3 during the scorching summer of 2011, it hasn’t happened yet.

One megawatt is enough to power about 200 homes when electric use is highest during the hottest days of the year.

Time-of-use programs may benefit the grid by increasing overall awareness of the importance of reducing electricity use at peak times.

“The whole resource adequacy issue relates to how you are able to meet your peak demand,” said Robbie Searcy, a spokeswoman for the Electric Reliability Council of Texas, which manages most of the state grid. “Increasing that awareness is of value from a grid reliability standpoint, because it affects consumer decisions at a time when it is most important.”

Peak conditions

Nearly 100,000 TXU Energy customers participate in programs offering free electricity at night or on weekends. Its free nights program offers free electricity from 10 p.m. to 6 a.m. every day, while its free weekend program delivers free electricity all day Saturday and Sunday. Annually, Texas households use about half their electricity at night or on weekends, according to TXU.

Activities that customers typically can reschedule conveniently include vacuuming, running dishwashers and doing laundry.

Technology improvements in energy-measuring devices, including smart meters and thermostats, have been essential in allowing companies to fine-tune programs that reward customers for shifting their electricity use to non-peak times.

Older meters only provided a total amount of monthly electricity consumption, while smart meters now installed on most residences in Texas measure customers’ power use every 15 minutes, opening the door to more customized programs.

Under peak conditions, when wholesale electricity costs $4,500 per megawatt-hour, determining exactly when a customer used power is critical to making time-of-use programs work.

And that need for precision has generated some skepticism.

“I don’t see the market as being ready for time of use pricing,” said John Werner, President of Source Power & Gas, a Sugar Land-based retailer. He said smart meters have not been tested enough in actual use to assess their accuracy in determining exactly when customers use power.

Werner said that longer-term trial testing should be required for smart meters, though he believes that in the long run, they will help reduce demand in peak conditions.

Werner also noted that because collective time-of-use data is not publicly available, it is difficult to assess whether the programs are a factor in relieving pressure on the grid at peak times.

And because customers in time-of-use programs typically pay more on weekdays, whether they enjoy actual savings on their electric bills depends on their individual power use.

Reliant, for example, charges 8.6 cents per kilowatt-hour for one of its fixed-rate plans called Learn and Conserve. But customers who sign up for an 18-month free weekends plan pay 12.7 cents a kilowatt-hour on weekdays.

Killinger, the Reliant executive, said that the plans are designed for customers who already have a lower demand for weekday electricity, such as residences with two full-time workers.

Buyers should beware

A Texas consumer advocacy group says electric buyers should beware.

“Consumers need to be very cautious with these kinds of time-of-use plans,” said Jake Dyer, a policy analyst for the Texas Coalition for Affordable Power. “You will get free power on the weekends, but the other times you could be paying an astronomical price. It is very difficult for us to see how these plans make sense.”

But retailers say that participation by certain customers benefits them and their retail providers, while reducing some peak strain on the grid.

“You will see more time of use and right time pricing plans,” said Jennifer Pulliam, director of products and innovation for TXU Energy, acknowledging that the suitability of these plans depends on customers’ power consumption patterns. “We are attracting customers that may not have considered us in the past.”