PEN-L message, Re: British Columbia madness

On Mar 4, 2007, at 3:01 PM, paul phillips wrote:

Gene, why is installing these meters a "stupid madness"?

Paul,

I think the energy problem is how much is used, not when it is used. It would be good to constrain peak demand but the real target must be energy use. Although it is widely believed that peak demand is very expensive, the capital cost of peaking units is relatively low. And most of the energy delivered on-peak is supplied by the much cheaper baseload coal, nuclear and hydro plants.

the following sentence in the article caught my eye:

The meters will allow Hydro to reward customers for using electricity outside peak periods.

Though it seems intuitively obvious to people, and especially to neo-classical economists, the real problem for an electric system is not the peak demand but to total energy consumption.

The meters spread the message: "Use all the energy you want, just don't use it on peak."

What will the peak price be? -- what will the meter tell the customer the price is on peak? If left to "the market" -- even the un-manipulated market, the peak price will be the cost of of producing kWhs at the most expensive unit running. Why should all the kWhs at that moment be so priced, when most of the energy being used is produced at plants where costs are lower, much, much lower? Although I don't like the jargon, there are very large intra-marginal rents here.

There would be enormous windfall profits for those plants or units. The market theory tells us that the only way investment in those plants, call them baseload plants, will occur is if they do get these windfall profits. So we need the very high price on the peak to drive the investment in baseload plants. Well that hasn't worked in California, or the USA, so the market gurus have fallen back to charging for both energy (the peak price) and capacity. How do you charge for capacity if the rates are based on energy usage? Well, you make the customers pay a capacity charge. They are doing that in New York and the recipients of the money are very grateful, but it hasn't produced the investment needed. Another drawback to the capacity charge is that it is and will be susceptible to cost shifting -- off the large users and onto the smaller customers.

If, on the other hand, rates are to be regulated in the old-fashioned way, so that the utility earns a return on investment set by some official body, manipulation of future growth is surely going to occur. If the regulator adopts the running cost of the most expensive unit as the price on peak, then profits during the peak period (day time) will be enormous as before. But the utility isn't entitled to those profits under the rate of return constraint. The response will be to cut prices to very low levels off-peak, encouraging process industries to use cheap electricity and for the demand of those industries to grow. Easily manipulated sales growth.

This is not to say that growth in the peak ought not be constrained. But regulators ought to use a price not nearly as high as the running cost of the most expensive unit dispatched. Regulators can use judgement to set the price. And so the message can be "Costs and prices are higher during the day, cut your usage, and what you can't cut, shift to other times." Spending $400 or $500 million on meters isn't necessary for that message to get out. A good public interest campaign can get it across.

Using "the market" for this problem, especially when using the market means spending $400 or $500 million facilitation is, in my judgement, stupid.

Gene