Arnold Kling  

Peak-load Pricing

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Lynne Kiesling and Vernon Smith explain peak-load pricing to the new governor of California.


current policy unfairly forces consumers to pay rates based on the average hourly cost of energy and industry capital investment. As a result, peak utility cost is much higher than what consumers pay, and off-peak and weekend cost is much lower than what consumers pay. The utility earns an abnormally high profit from off-peak consumption and loses money from peak sales. Peak period sales are thus subsidized by the implicit transfer of funds from the utility's high profit on off-peak users. In effect, utilities profit on energy needed to dry clothes at 6 a.m. and subsidize clothes dried at 4 p.m.

For Discussion. What type of incentive would be easy to administer and easy for consumers to understand?


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COMMENTS (15 to date)
Bob Dobalina writes:

"What type of incentive would be easy to administer and easy for consumers to understand?"

Two rates: peak and off-peak.

An electronic meter that discriminated between the two, and triggered a light (inside the home) whenever power was at the peak price.

And while I bet existing technology coud do me ten times better, this is a simple, easy to understand approach.

Boonton writes:

Would I have to pay for that 'peak light'? :)

Bob Dobalina writes:

No, Boonton, the government will pay for it, so it's free!

Mats writes:

"Two rates: peak and off-peak." is not a bad idea, we have had it implemented here in some places. Observe however that electricity markets are hard to privatise just because this sharp edge between cheap almost fixed-cost power from e.g. nukes, and more expensive high running-cost power from e.g. gas-turbines:

http://blogofpandora.blogspot.com/2003_11_01_blogofpandora_archive.html#106841272179099261

John Thacker writes:

Any sort of peak vs. off-peak pricing would be easy to consumers to understand, assuming that they had some type of telephone (cellular or not) plan.

Eric Krieg writes:

I don't doubt that peak load pricing COULD be done. I content that it CAN'T be done (profitably) with the electric system as it now exists.

Peak pricing requires every electric user to install new "smart" electric meters. This is not an insignificant problem. DSL was sidelined for many years because of the need to have a technician come to your residence and install a filter on your phone line. DSL only took off when the DSL companies devised a self installation kit.

What are the chances that the power company is going to let you install your own meter? Nil.

Secondly, how is the metering information going to be transmitted back to the power company? There has to be a communications infrastructure from your meter back to the company. That infrastructure does not exist, and it will cost MONEY to implement.

It is easier for the power company just to build more electrical capacity for those peak loads and just jack up their rates in order to pay for the excess.

Eric Krieg writes:

Where the hell is Lynne? I would think that I would at least get a reply post from her!

Um, Eric:

About Lynne:

This whole thread's been in existence on EconLog for under two days. Lynne Kiesling's in fact posted at The Knowledge Problem about having a busy time the last few days.

So, your impatience about Lynne's not responding is intended as humor, right?

Lauren

Eric Krieg writes:

Of course, humor.

Whew! Cool.

Lauren,
apologizing for sometimes being humor-impaired

Eric Krieg writes:

No problem. I'll give you a break because you're from Rochester (I lived in Batavia for 2 years).

Lynne Kiesling writes:

Hi Eric, and Lauren, and Arnold, and all!

Yep, I'm here, and I think Eric's right that as long as state regulators continue to grant utilities the monopoly over metering and the information that accompanies it, metering will go nowhere. Our job is to convince the state regulators that this government-granted monopoly over metering, and thus over information, is not in the public interest.

Now you see why I'm so busy ...

BTW, if you compare the cost of meters to the cost of building a submerged high voltage line, at about $370 million per mile in 1995, then metering looks like a bargain as opposed to building new grid.

Randall Parker writes:

As for the problem of installing smart meters: There is a rate at which meters fail and have to be replaced. Plus, there are new structures built. The migration to smart metering could be done gradually. There could even be a charge for those who want to switch to them who are not installing a new house. So if you thought you could save enough money to make it worth paying for the install you could opt for it.

The whole idea Lynne is arguing for is to make it a market. If a real market is creating then that market will include pricing for migration versus staying with current meters.

Eric Krieg writes:

Lynne,

My father in law is a VP of distribution at New York power company, so I know the mentality of power company executives.

They have been investigating ideas like smart metering, but this has been overshadowed by things like restructuring (New York broke distribution from generation about 3 years ago, so they companies are still restructuring).

As far as the communications infrastructure, I suppose the meter could simply display how many kWhrs were at the low rate and how many were at the high rate, and the meter readers (yes, they STILL have those, unbelievably) could simply write down 2 numbers instead of one.

But a meter that could communicate with a central server would be much more flexible (you could have MANY rates), much more efficient, and could offer many, many more services (turn off your a/c on a hot day, for a big discount, for example).

Pouncer writes:

Phone service provides a model. (And satellite T.V.)

Stay with the old line and utility, and you can continue to use the old equipment.

A competitor offering a lower price (in a more complicated plan), however, may require you to pay a one-time "installation" fee where the lineman comes out and puts a new gadget out on the wall. At certain times, for promotion, the gadget price and the installation fee may be waived.

That the phone companies are all going broke in a hurry is no indication this model wouldn't work "just as well" for the electric utilities...

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