Question: Which one is not like the other: MLB ticket, an airline seat, your electricity bill?

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SEPTEMBER, 2016

Answer: Your electricity bill. The other two use dynamic pricing, your utility does not.

Dynamic pricing is a strategy where businesses set flexible prices for products based on the current market demands. We have all experienced this when we have purchased an airline ticket, or a ticket to a baseball game. As seating on an airplane gets full, and the day of the flight approaches, the price goes up because the demand is higher. The same premise exists in buying a ticket for a Major League Baseball game. Many teams use dynamic pricing to adjust the prices based on how many fans want to see a particular game.ightbulbs.

So why does your electric bill not reflect the market forces like buying an airline ticket? If you’re like most residential users of electricity, you’re on a flat rate bill from your utility. You’re charged a flat amount per kilowatt hour of electricity you use. It doesn’t matter if that electricity costs a little or a lot of money to generate, you get charged the same flat rate per hour of use.

For example, on a hot summer afternoon, when everyone’s air conditioners are going full blast, the demand for electricity goes up and up and up. The cost to create more electricity to meet that huge demand is very expensive at times, yet you are still only being charged that flat amount. On the opposite end, after 9:00 PM the demand for electricity drops very low, and the cost to create it is much less, but you still pay the flat rate per hour of use regardless of the cost to generate the electricity.

When you go to airline websites they show you the flight options and the prices for each. Certain days and times are not as busy so the fare is less expensive. Alternatively, certain flights and times are in very high demand, and you see that reflected in the price. If your electricity bill was using dynamic pricing, and you had the technology that showed you the times and rates during the day that were in high demand and high price, would you alter your energy usage?

Here is a real life example: In Texas, there is a utility company that has so much extra electricity generated by wind power at night (the wind blows more at night than in the day) that they are offering FREE electricity after 9:00 PM. Would you wait and run the dishwasher, the washing machine, the drying, etc. after 9:00 PM? Would you pre-cool your house, if it has good insulation during the night and raise the temperature on the thermostat a few degrees during the day before the A/C kicked on?

We’re all consumers, and we all respond to prices in the marketplace, and the same goes for energy usage. Some utilities are giving homeowners the choice to pick their energy plan between the dynamic pricing model and the flat rate model. In the US there are 114 Million households that have smart meters that allow for this type of market based pricing, yet less than 2% of those households are on some type of dynamic or time of use rates. That number is only going to get larger. Information and technology continue to provide consumers with more options and choices, and your electricity bill soon may not be immune to those market forces.

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