Fixed pricing for electricity should go the way of the rotary dial telephone. We could solve many of our regional energy problems by more accurately pricing electricity closer to the actual cost of generating the power. Those costs vary dramatically based upon seasonal and hour-to-hour fluctuation in electricity demand.
Because electricity is difficult to store, the laws of physics demand that electricity must be produced at the same time it is used. This means that during periods of high demand – say a hot and humid summer afternoon when air conditioning is widely used – virtually all of the power plants in the region must be running. Conversely, at 3 a.m. on Memorial Day weekend, very few plants can run.
Grid operators meet this dynamic demand by first turning on the plants having the lowest operating costs: wind, solar and nuclear. Wholesale generation prices as low as one or two cents per kilowatt-hour (kwh) are common during these off-peak times. As demand increases, the grid calls on the fleet of gas plants beginning with the most efficient and ending with the least.
Finally, during peak usage hours the grid operators turn on the oldest and most expensive generators, typically fueled by oil. Electricity used produced during these peak hours from these plants creates more emissions, is more expensive and is more wasteful of natural resources than power produced in off-peak times. Wholesale generation prices can climb to 20 cents or more per kwh during these peak usage times. (Note that these generation prices do not include delivery costs, which are usually shown separately on your bill.)
The rational response to these facts would be to encourage less electricity use during peak hours and more use during off peak hours. In most commodity markets, these widely varying costs of production would be passed through to consumers in the form of varying prices or other incentives and disincentives. Otherwise, a business charging ten cents for a product that cost 20 cents would eventually go broke. And a business charging ten cents for a product that cost two cents would quickly lose sales by being under-priced by competitors.
But because the electric rates that we pay are regulated, most consumers see a constant price per kwh regardless of when they use the power or how much it cost to produce. A 2015 Connecticut statute requires even non-utility competitive generation suppliers to use fixed pricing.
Using annual average prices for electricity generation fails to send the correct real time price signal to consumers. If we had real time pricing, you might decide to run your air conditioner at 20 cents per kwh to stay comfortable, but would you run appliances like dryers, dishwashers and the like? Not when you could run them at night for two cents per kwh.
Once customers understood that power was cheap at night, more expensive during the day and very expensive during periods of extreme hot or cold weather, we would see many positive changes.
Manufacturers might offer smarter appliances such as refrigerators that allowed slightly higher temperatures when power was expensive. Customer behavior would change too. For example, newer dishwashers can be set to run at night. But when the price of electricity never varies, most customers never bother to use this feature.
Pricing power based on the time of use would reward customers who took advantage of these features. The value of investing in super-efficient air conditioning equipment would increase, as would the benefits of windows, insulation and even landscaping that minimized the need to run the cooling equipment.
Encouraging these shifts in electric load would have dramatic positive effects. Those expensive oil-fired power plants with high emissions would run less. In the long run, we might even get along with fewer of these “peaking” plants as some peak load shifted to off peak. The result would be cleaner and cheaper power.
There are some challenges to be met. Most customers would need more sophisticated electric meters, though it is readily available commercially. Higher operating costs for summer air conditioning would challenge low income customers and could initially result in higher-than-expected power bills.
But the payoff from letting the market respond to accurate pricing should provide more than enough benefits to deal with or offset these issues. A little consumer education and faith in customers’ ability to adapt to market changes would go a long way toward easing the transition.
Paul McCary is an attorney at Murtha Cullina LLP. He co-chairs the firm’s Energy Industry Group. He also teaches Energy Regulation and Policy at the University of Connecticut Law School.