California may again offer the nation a useful illustration this summer of how not to deal
with an energy crisis.
California Energy
Blog last month passed along the warning from the Federal Energy Regulatory Commission that
the southern half of our state is in “the worst electricity supply situation in the entire
country.” I’m not worried about it, though, because I know that the California Energy
Commission has been working for five years to come up with a plan.
And here it is, in all its glory: the fifth annual installment of the flex your power now! campaign. In the Commission’s own
words, here’s how it works:
Pitch in this summer, California. When you hear the “Flex Your Power NOW!” alert, immediately
conserve energy. Learn more about what to do when you
hear the alert.
But the really cool thing is the “Conserve-O-Meter”. Go ahead, I’ll wait here while you check it out.
And thus we continue in the great tradition of California regulators, who seek with great
diligence, earnestness and, dare I say, ingenuity, to try to balance supply and demand every day
by telling each one of us exactly what we need to do. As long as we all maintain the proper
spirit and check up on the Conserve-O-Meter as the day progresses, I’m certain that all
Californians can be counted on to do the right thing, ensuring the equality of supply and demand
as a result of conscientious attention to civic duty.
I suppose that it’s because I’m an economist that I find this mindset a bit baffling. I do
not understand why the California Energy Commission assumes that people will pay more attention
to “flex your power now” alerts than they would to something that actually affects their
pocketbook. Call me cynical, but I somehow figure that adding to the dandy phrase “flex your
power now” the explanatory sequel “because if you don’t, it will cost you more” could give the
program just a bit more effectiveness.
As noted by
Peak Oil Optimist, some stabs at peak load pricing are being explored in the state on a
piecemeal basis, such as our local San Diego
supplier’s plan to charge the largest electricity users a higher rate when the need for
conservation is greatest. But there seems to be considerable reluctance to implement such
schemes for all electricity users.
In part I suppose this represents the view that regular people (as opposed to heartless big
companies) don’t like to have to pay for more for electricity at some times than others. But
regular people don’t like to turn down their air conditioners when it’s hot, either, and they
like it even less when there’s a general blackout and nothing happens when you flip any
switches. My big idea is to let people choose between (a) and (b) in order to make sure that
(c) doesn’t happen.
Or maybe the regulators reckon that companies are smart enough to figure out how to lower
their electricity use when there’s a strong enough financial incentive to do so, but ordinary
people aren’t. Though one wonders, if they trust me with a Conserve-O-Meter, why don’t they
trust me with an electric bill?
But even this excuse of those poor stupid consumers may soon become technologically obsolete.
Lynne Kiesling at Knowledge
Problem describes some extremely useful new technology developed by Pacific Northwest National Laboratory:
It works like this: you buy an appliance that has one of PNNL’s grid-friendly controller chips
installed; the chip can cost anywhere from $5 to $25 depending on how sophisticated the desired
appliance response is. In its simplest form, a hot water heater with the grid-friendly
controller can send and receive information about how much energy it’s using, and it can be
programmed to use less power at various triggers (such as peak hours). If it’s programmed for
more sophisticated response, you could program your hot water heater to have an automated
response to retail power price changes.
Gizmos like that, and a pricing structure that encourages their use, would bring a conclusive
end to the era of electricity brownouts and blackouts. But I hope they leave the
Conserve-O-Meter up as a fun souvenir of the way things used to be.
Comserve-O-Meter! Priceless. This resolves the mystery of what happened to all those people responsible for the “Whip Inflation Now” campaign.
The key to make this idea work is to present it in the form of lower prices at night (or whatever the off peak hours are) rather than higher prices in the afternoon. In other words this has to be perceived as a way to save money, by doing the laundry in the early morning and time-shifting other energy intensive activities, not a way to charge customers more. Since such changes genuinely do reduce costs by eliminating the need for expensive increases in peak generation capacity, it should be possible to offer savings to those consumers who are able to make these substitutions.
If they can’t actually lower overall costs, at a minimum it ought to be revenue-neutral, so that the off-peak prices would still be lower than they were before.
Yeah, but I’m looking forward to seeing commercials with Arnold snarling “Flex Your Power NOW!” in a thick Austrian accent. Honestly, if this is the dumbest thing that the state can come up with, then I’m pleasantly surprised. I expected something far more Draconian. This is merely incompetent.
Let’s see. How can we blame Enron for this?
One of the enduring myths of this era of criminalizing business practices is that Enron’s energy trading policies were one of the primary causes of California’s power crisis during the early part of this decade. Well, with Enron gone, that…
The only way peak power pricing has some utility is to time shift usage to off peak hours. For business the only realistic way to do this in a substantive way is to change work hours. In fact scheduling large users’ access to power would probably be more efficient than any price mechanism. What is stupid is the idea that individuals are careless about power use and squander it at peak hours for the pleasure of it. Peak power pricing is simply a dumb idea used to prevent building adequate capacity.
Lord, what is dumb about peak power pricing? The kilowatts sold at peak comsumption cost a utility more to produce (since it is these kilowatts that determine capacity requirements.) Rather than preventing the building of adequate capacity, one ought to view peak power pricing as a way to fund the building of new capacity.
Regardless, utilities have found that the technique does help smooth demand over the day. That is the measure of success.
Peak power pricing doesn’t work because it asks for 30 year investments be made to be paid for by minute by minute charges. Instead of providing any incentive for producing peak power, it provides an explicit incentive for not producing it by the higher prices generated. It bears as much responsibility for the energy crisis as Enron. It creates no efficiency, but merely transfers efficiency from consumers to producers. Everyone pays, whether by cost or by convenience. The one thing is does do is create a strong incentive to move off the grid to consumers producing what they themselves need. One can argue that this is somehow more efficient, and certainly it helps cogeneration and solar energy compete, but whether overall efficiency is improved is at best doubtful.
Where Oh Where Is Our Peak-Load Electricity Pricing?
On the radio, right now, a cricket is chirping in an attempt to convince me to “flex my power” and buy a more energy-efficient washing machine. This kind of campaign is driving Jim Hamilton (and me) up the wall: Hamilton writes: Econbrowser: Some like …
This reminds me of those thrilling days of yesteryear – the great California drought, when all of us homeowners were asked to cut consumption. They baselined comsumption and above that would cost you. Well it so happended that the baseline year was when I had 3 teenagers in the house using water like it was water. I did the right thing and did cut consumption untill the scales fell from my eyes one day while driving about the Sillycon Valley and watching commercial companies watering lawns and flowers and letting the excess run in the streets. Also at work we had vast expanses of grass that got watered on schedule and of course with lots of water running in the street. That was the point when I said never again. Also a run down I5 and watching overhead sprinklers watering cotton caught my attention. This type of irrigation was used mainly to cool the cotton as most of the water just evaporated before reaching the plants roots.
These experiences don’t lead to the little consumer paying much attention to these type of campaigns.
How much of the issue of energy shortfalls in California is due to usage versus supply? I can’t recall the last time a major power plant was opened in the state.
The good part about economic laws is that they hold for everybody. Cabdriver or media-mogul, corporate or private.
Law 1:
– If price goes up, demand goes down
Ignoring this mechanism is like ignoring gravity.
Any other mechanism will fail, cost lots of money, anger, unnecesary effort and I really wish that our beloved government would finaly understand it. Why not spend half an hour in UCLA Econ 101? Best investment ever.