Tuesday, August 23, 2011

Consumer choice of time-of-use or flat-rate

A 23 August 2011 article, entitled ‘PC candidate says smart meters bad for business’, appeared in The Barrie Advance.  In it, the PC Party’s plan for moving away from obligatory time-of-use rates was noted.  The relevant part of the article is as follows:  ‘[PC candidate Rod] Jackson said families and business should be able to choose what works for them – and opt out of smart meters. He couldn’t say, however, what rate they’d pay – an off-peak, mid-peak or on-peak rate. “It’s a good question. It’s up to the Ontario Energy Board. It won’t be as much as for a smart meter,” he said.’
I am left to wonder how prices can really go down when consumers are left with a choice of time-of-use rates or, say, some kind of flat-rate.  The revenues from the customers need, of course, to cover the costs of providing the electricity, so without a change in the cost of supply (which, admittedly, may be part of the broader PC platform), the money coming in has to be the same.
To give this further substance, I laid out the following simplistic example. (And noting my earlier comments in this blog, I recognize my own problem for concentrating upon ‘commodity costs’, but the point does not depend on that.)
Imagine customer A and customer B with load profiles as below.  If both are paying in a time-of-use environment, then the total revenue is 141.4 cents.  If both were paying in a flat-rate environment, the total revenue would be 140.0 cents.
Now if each was given the choice, customer A would stay on time-of-use rates (a heavy off-peak user) and customer B would choose the flat-rate tariff. Total revenue is now 136.8 cents.  Would it not be that the missing revenue would have to be made up by increasing the relative costs (say to 6.1/9.1/10.9 and 7.2 – that is, increases of about 3%), which would then generate revenue of 140.8 cents?

kWh use during off-peak (5.9 cents/kWh)
kWh use during mid-peak (8.9 cents/kWh)
kWh use during on-peak (10.7 cents/kWh)
Total cost under time of use (cents)
Total cost under flat-rate (assuming 7.0 cents/kWh à blending 6.8 and 7.9 cents/kWh prices)

It will be interesting to see if these options that will be available to customers will be more fully elaborated during the campaign.

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