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.


"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.

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.

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.

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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