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Will California adopt peak-load pricing for electricity?
One of Vernon Smith's favorite ideas is on the table:
If the California Public Utilities Commission approves the business pricing plan, 8,000 businesses that already have the meters would be required to pay more during peak times starting in January...Even if businesses are forced to use the smart meters, home users seem likely to have a choice.
The utilities do, however, want the smart meters installed at every home, and hope regulators will approve a rate increase in July to pay for installation starting in the fall. PG&E said the project would cost about $1.6 billion over several years, adding about 69 cents per month to household bills.
The meters would transmit the data through either phone or power lines to PG&E. Customers would be able to go online the next day and monitor their energy consumption.
In many cases, energy experts say the pricing system used in conjunction with the meters could lower household electricity bills by helping them shift their use to times when power costs less. Those who can't adjust during high-rate hours would see higher bills.
What is the reaction?
...businesses call it an unfair burden. The Silicon Valley Leadership Group and the Building Owners and Managers Association say their member companies already try to conserve power, and mandating the price system would only drive up costs.
Here is the full story. This, of course, is the classic trade-off as identified by Brennan and Buchanan in their classic The Power to Tax. Greater efficiency also means greater efficiency in revenue extraction.
Posted by Tyler Cowen on May 29, 2006 at 01:20 AM in Economics | Permalink
Comments
"Greater efficiency also means greater efficiency in revenue extraction."
Erm but isn't efficiency in tax collection always a good thing? Inefficient revenue extraction could end up taking more than would be needed if the system was efficient.
Posted by: Factory at May 29, 2006 4:52:49 AM
Here in Ontario the government is planning the same thing, including smart meters and peak-time pricing.
http://snipurl.com/r2tp
Posted by: Spadinasaur at May 29, 2006 8:34:11 AM
Well, personally I think you are being a bit too credulous Tyler when it comes to what the business people are saying. A firm that can shift load (say run a graveyard shift vs. running one during the day) might acutally see a decrease in their bill. Of course, the added costs of running a graveyard shift would have to be compared to the reduced electricity bill, but some of these large users are very large. For example in the SCE service territory there are about 200 large power customers and they consumer about 25,000 GWh, if memory serves. That is a lot of electricity, and make for very big bills.
And residential customers have quite a bit of ability to shift usage. For example on a hot day, turn on the fans and set the thermostat higher. Right there that can be big savings. Also, run appliances during the off peak (i.e. right before going to bed for things like the dishwasher). And unplug that fridge in the garage, or make sure it is full instead of with just a 12 pack of coke and a case of beer.
Basically, I'm a bit surprised that at a site named marginal revolution you'd take such an indifferent view to improving price signals.
Posted by: Steve at May 29, 2006 12:34:38 PM
Since the LED bulb is now capable of 80 lumens per watt, in about 3-4 years, it ight be worth their while to switch over.
Either way, get ready for higher taxes, the more efficient we become, the more tax revenue goes down.
Posted by: Sandy P at May 30, 2006 11:13:19 AM
A similar approach was tested in Washington state several years ago. It did not work out well. The
difference in the prices was sufficiently small that the advantage gained from switching time of use
to nonpeak periods was almost nonexistent, particularly with any residual use of electricity at the
higher price during peak periods. For something like this to work it may require segmentation of the
market and segment specific pricing, as well as considerable sensitivity to the actual impact of the
pricing structure on the consumers and a willingness to admit and correct mistakes.
In one short sentence, I am not optimistic it will work.
Posted by: am at May 30, 2006 7:21:08 PM
I am sympathetic to Steve's comment about price signals, and I too expect that a signal shifting consumption away from peak hours would propably have a salutary effect. But in this case, it wouldn't be a price signal. It would just be the result of haggling among politicians and lobbyists.
To get a market price signal you have to have, you know, a market.
Posted by: ArtD0dger at May 31, 2006 1:03:53 AM
In the 'market' part of the Texas system, some of the big companies are on contracts which are based off of the MCPE(Market Clearing Price of Energy - normally the price ERCOT pays for balancing energy), which is a price for power in 15 minute intervals. These companies can track the MCPE on a real-time basis, and cut power when it rises too high. Why mess with mere fixed peak-load pricing, when you can use an actual wholesale price of power?
Residences will never, as a whole, use, or benefit, from peak-load pricing. The stuff you need to install (time sensitive thermostats, advanced meters) and learn (how to program the thermostat to raise/lower the settings from 2-7, what the rate structure is, etc.) can never be worth the couple of bucks a month, at most, the typical residence can save. Customers won't spend 15 minutes to switch power providers to save 15-20 dollars a month, they won't suffer 85 degree AC settings when they get home from work to save 2.
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