The Short-­‐Term Benefits of Adopting a Real-­‐Time Pricing Rate Structure for Retail Electricity in the Midwest ISO Region

Abstract

By improving the degree to which retail electricity transactions take place under free market conditions and eliminating deadweight losses caused by the flat rate most consumers currently pay, the long-term benefits of charging electricity users based on a real-time pricing (RTP) rate structure are projected to be very large as a percentage of total energy costs. In the Midwest Independent System Operator (MISO) region, the benefits are estimated to be at least $500 million per year in the long run. However, in order to adopt RTP, significant investments in the infrastructure required to support it must be made. Specifically, smart meters capable of measuring when electricity is consumed must be purchased and installed to replace conventional “dumb” meters used today. The total cost of the transition could be as high as $10 billion in the MISO region, of which approximately only $6 billion will be saved directly in utilities’ operational costs. This study was designed to determine whether the deadweight losses eliminated by RTP in the short run are great enough to bridge the gap between the short-term costs of smart meter installation and the shortterm gains in operational savings. The results of the study indicate that the deadweight loss RTP is capable of eliminating in MISO in the short run is valued at approximately $180 million per year. While large, these benefits will not likely directly convince regulators and utility managers to make the necessary remaining $4 billion short-term investments in infrastructure. Therefore, regulatory changes, tax incentives, targeted deployment and other policy approaches to promote RTP adoption must be considered if the region is to reap the considerable long-term economic efficiency gains RTP can deliver.