Dynamic Pricing: How To Lower Your Electric Bill

Just like the person next to you on the airplane might have paid a different fare and on the road, pays a different toll, so too might your electricity rates differ from your neighbors. You just need a smart meter…and maybe a smart dishwasher also.

A household with a smart meter does not need a human meter reader. Instead, talking directly with the electric company, the meter sends data on that household’s usage. Receiving the data, the electric company can then send information back to the user.

Where are we going? To dynamic pricing.

How Dynamic Pricing Saves You Money

Keeping an eye on their smart meter app, homeowners can learn real-time changes in electricity rates. Smart meter advocates hope that knowledge of rates will reshape electricity usage. If rates fall at 3 am because of less demand, then perhaps more homes will run dishwashers at that hour. Some people will have to arise at 3 am to save the money, others might have a timer starting the appliance and a third group could just have the smart meter tell the smart dishwasher to start.

For everyone, except the meter reader, advocates say it is win win. The user has a lower bill. The utility can spend less on capital because it no longer needs peak usage capability. The environmental impact diminishes.

But still dynamic pricing for electricity bills has not been popular.

The supply side has been slow. After all, they need a radically different infrastructure through which they eliminate meter readers, convey information about compatible appliances, design and implement new smart meter installations, and figure out organizational and grid capacity for the practicalities and implications of real-time pricing. (If you look at recovery.gov, you can see that grants as large as $57 million from 2009 still have been minimally spent on smart grid installation.)

On the demand side, some people are resisting what they say is an invasive technology while many others are just not interested in figuring the whole thing out. One explanation for consumer reluctance was that utility companies needed clearer directions and better consumer education. (Perhaps instead they just needed Steve Jobs.)

We can forget the clear directions when behavioral economics enter the picture. In Nudge, Sunstein and Thaler describe the “Orb,” a device that glows red when energy use spikes and green when people use less. Whereas emails and texts from utility companies had little impact, the Orb appears to have cut energy use during peak by 40 percent.

Our Bottom Line: Pricing Power

As a near monopoly, an electric utility has the ability to determine dynamic pricing because it is a price maker. But still, it has to recognize consumers’ demand elasticity.