E-Source Survey Forecasts Power Price Volatility

For four hours on May 8, NEPOOL's electricity prices spiked to $6,000 per megawatt-hour (MW), roughly 200 times the normal price of about 3 cents per kilowatt-hour (kWh) for wholesale power. E-SOURCE, a Financial Times Energy Company, contends that until end-users are able to see dynamic prices, these spikes will continue to occur. To get a better idea of how U.S. businesses might respond if they were able to see price spikes at the retail level, E-SOURCE took a recent survey of corporate energy managers at some 30 top firms, including Merck, Gillette, Johnson & Johnson, and Home Depot. Bill LeBlanc, vice president of the E-SOURCE Retail Consulting Group, noted that "these leading-edge energy decision-makers can give both end users and energy service providers a good preview of what's to come in the evolving energy marketplace."

E-SOURCE first asked the managers to determine which loads at one of their largest facilities were absolutely necessary and which could be turned off without the company suffering undue hardship. Next, E-SOURCE held a mock power auction to determine how many reduced kilowatts—or "negawatts"—these businesses would be willing to sell back into the system at different price points. From a total load of 240 MW, the managers indicated that 155 MW, or 71 percent, would never voluntarily be turned off. But under the right circumstances, they were willing to cut up to 27 MW, or 11 percent of their load, most often by reducing lighting or curtailing cooling and ventilation functions.

At a price point of 15 cents/kWh, the managers offered up 3.3 MW, or 1 percent of their load. At 25 cents, they said they would provide 4.8 MW in reductions, and at 50 cents their offers rose to 12.2 MW, or 5 percent of the load. When prices reached $1.00/kWh (or $1,000/MWh), the managers said they'd give up nearly 16 MW, or 7 percent of their load. And at $5.00/kWh—very close to the NEPOOL price of $6,000/MWh—they offered a whopping 25 MW, or 10 percent of the total load.

LeBlanc contends that "when you see this level of response proposed from end-users, it's clear that price spikes could be dampened with this approach. E-SOURCE predicts that if 5 to 10 percent of commercial and industrial end-users were receiving peak load pricing signals, wholesale price spikes could be reduced by at least a factor of 10 from these highly inflated levels."

But which customers are most likely to respond to real-time rates? E-SOURCE is launching a major North American multi-client market research study to find out. For "Energy Pricing and Load Management: What Do End-Users Want?" E-SOURCE will talk to nearly a thousand large and midsize energy users to find out who's interested in dynamic pricing, who would pay a premium to avoid price and reliability risk, and what equipment and how much load customers would turn off at a variety of premium prices. "In addition to telling us which market segments are most likely to participate in load management programs, the study will pinpoint the kind of contracts each group prefers and show utilities and power marketers how to position themselves to take advantage of such pricing products," says LeBlanc. "We'll learn what kind of pricing options end-users want that they aren't currently receiving from utility tariffs and power marketers."

Jerry White, an affiliate executive consultant with E-SOURCE and former vice president of marketing at Unicom, the Chicago-based holding company for Commonwealth Edison, says, "At ComEd, we had acute needs for peak load reduction for years. We instituted one of the most aggressive and advanced load management and dynamic pricing portfolios in the country." It launched 10 different load management products, from simple interruptible rates to a dynamic-pricing approach with a structure similar to a wholesale call option. By 1999, ComEd had almost 1,100 MW available for reduction during summer peaks. White contends that "the new generation of load management products will be one of the real areas of innovation as a result of industry restructuring. With new monitoring, control, and communications tools enabled by the Web, the market opportunity is huge and shouldn't be ignored by energy suppliers."

Edited by Stephen Heiser