Last week, the WSJ ran a nice piece on “smart meters” and energy utilities (“What Utilities Have Learned from Smart-Meter Tests … and Why They Aren’t Putting Those Lessons to Use“). Some interesting stuff. First, a distinction between (information about) quantity and (information conveyed by) price is worth bearing in mind.
By making variable pricing plans possible, smart meters are expected to play a big role in getting customers to reduce their peak-hour energy consumption, a key goal of utility executives and policy makers. Electricity grids are sized to meet the maximum electricity need, so a drop in peak demand would let utilities operate with fewer expensive power plants, meaning they could provide electricity at a lower cost and with less pollution.
In some ways, this is what it’s all about, eh? Bringing down usage and production costs, not so much about smarter consumers.
Utilities have run dozens of pilot tests of digital meters and found that people cut power consumption the most when faced with higher peak-hour rates. But utility executives and regulators have been reluctant to implement rate plans that penalize people for too much energy use, fearing that if customers associate smart meters with higher bills, they will stall the technology’s advance just as it is gaining traction. Only about 5% of U.S. electric meters are “smart” today, according to the U.S. Department of Energy, but that figure is expected to grow to about one-third in the next five years.
Pretty straightforward politics, that is. But it is an odd conflation to mix smart metering with peak-load pricing.
So, many utilities are trying an approach that is less controversial, but also less effective: offering rebates to customers who conserve energy in key periods of the day. By doing things like turning off clothes dryers and adjusting air conditioners on hot summer afternoons, customers earn credits that can reduce their electricity bills.
This example is also pretty intriguing, begging a citation or two, as it’s curious to think a price rebate for nonuse isn’t equivalent to a price hike for use … unless there’s a substantial income effect or some more psychological factors. The old ‘baby Varian’ textbook has an interesting example that’s like this, if I remember correctly. “Less effective” isn’t what comes to mind. Less costly for consumers, perhaps…
Now here’s a funny story about bad planning rather than bad timing:
Pacific Gas & Electric Co., a unit of PG&E Corp., got a taste of the public-relations risk last summer when it installed smart meters in Bakersfield, Calif., as part of a broad upgrade in its Northern California service territory. When customers—who weren’t participating in any sort of experimental rate plan—received dramatically higher bills shortly afterward, they blamed the meters for what they assumed was faulty billing. The San Francisco utility investigated and concluded that the meters were functioning properly. It found that the higher bills were simply a case of unfortunate timing: An increase in conventional rates had taken effect just ahead of unseasonably hot temperatures.
The seasons are fairly predictable, although temperatures might not be. Sounds to me like heading into the summer season is just a bad plan.
PG&E now has a voluntary program in which customers agree to pay higher peak rates of 60 cents a kilowatt-hour for no more than 15 days a year, in exchange for a discount of three cents a kilowatt-hour for electricity used at other times. So far some 26,000 customers have signed up.
Sounds like the textbook approach. Why is this so tough to figure out?…
Pepco Holdings Inc. recently did a pilot test in Washington, D.C., of three rate plans designed to gauge how customers respond to different price signals. One plan pegged the price, which ranged from a penny to 37 cents a kilowatt-hour, to the wholesale cost of electricity. One charged a “critical peak price” of 75 cents a kilowatt-hour during certain hours on a handful of days, and 11 cents per kwh at other times. The final plan gave customers 75 cents for each kilowatt-hour of energy saved and charged 11 cents per kwh for power used.
Results showed that people responded most when threatened with the 75-cent-per-kwh peak pricing. Those customers cut their overall energy consumption between 22% and 34%, depending on whether they also had programmable thermostats that could automatically change temperature settings. Customers offered rebates reduced their usage 9% to 15%—again, with the deeper cuts among those who had smart thermostats.
OK. Time to calculate some elasticities. Supposing that the $0.75 was double the peak scarcity price of $0.37, and a 100% increase in price got you a 22-34% reduction in quantity consumed, we’re looking at a short-run price elasticity of demand of mere -0.22 to -0.34. Not out of line with the literature, and not terribly surprising. Except that my back-of-the-envelope math is wildly simplifying and like waaay off. Prices only doubled for the group for a few hours on a few days. Thus, their overall price didn’t really double, but only doubled for a short spell. Yet, despite that only momentary price spike, their overall consumption still fell by ~30%. This looks like demand is much, much more elastic than -0.3!
Many experts feel that not enough research has been done to protect those who aren’t able to change their electricity usage.
Sure. Personally, in this context, I’m also concerned about those who are able to change their usage. Some people may be choosing to cut back on things that we don’t want them to (e.g., A/C during heat waves, TV during the DailyShow).
Last summer, Connecticut Light & Power Co., a subsidiary of Northeast Utilities Service Co., gave new meters to 3,000 residential and business customers, testing three types of rates. Like other utilities, it found that homes facing the highest peak-hour pricing—$1.60 per kwh at certain times—responded the most, cutting peak use 16% to 23%, depending on whether they had other aids like smart thermostats. Commercial customers, in a similar test, cut their demand far less, only 7%.
Ah, good. Different users have different elasticities — and apparently commercial customers had more inelastic demands. I suspect that’s not too surprising, especially if peak times are during regular business hours and considerable residential usage can be flexibly reallocated during the day.
But the utility also concluded that it wouldn’t be fair to really crank up peak pricing until homeowners have greater access to automation tools such as smart appliances and controllers. In the future, devices will contain computer chips and software so they can go into energy-saving mode in response to a signal sent from the utility or another energy manager that higher prices are kicking in.
I’m thinking “where my iPhone app for this?”….
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