Assessment of smart-meter-enabled dynamic pricing at utility and river basin scale

The advent of smart metering is set to revolutionize many aspects of the relationship between water utilities and their customers, and this includes the possibility of using time-varying water prices as a demand management strategy. These dynamic tariffs could promote water use efficiency by reflecting the variations of water demand, availability and delivery costs over time. This paper relates the potential benefits of dynamic water tariffs at the utility and basin scale, to their design across a range of timescales. On one end of the spectrum, sub-daily peak pricing shifts use away from peak hours in order to lower a utility’s operational and capital expenses. On the other end, scarcity pricing factors in the variations of the marginal opportunity cost of water at weekly or longer timescales in the river basin where water is withdrawn. Dynamic pricing schemes that act across timescales can be devised to yield both types of benefits. The analysis estimates these benefits separately for Greater London (United Kingdom) and its 15 million inhabitants. Scarcity pricing implemented on a weekly timescale equates the marginal cost of residential water with estimates of the marginal economic values of environmental-recreational flows derived from tourism, property values, etc. Scarcity pricing during droughts could result in a 22 to 63% average reduction in environmental flow shortage whilst residential price increases would be capped at 150% of base levels. Yet, its ability to protect environmental flows could decrease in extreme shortage situations.
The net present value of savings from peak pricing is conservatively evaluated approximately at £10 million for each initial percentage point in daily peak hour price increase.