Wednesday, August 10, 2011

Will Peak Pricing Create New Peak Periods?

On Wednesday, 10 August, an article by local radio commentator Brian Bourke, entitled ‘Confessions of a Hydro Tyrant’, appeared in The Waterloo Chronicle.  What jumped out at me was a theme that seems to be appearing repeatedly in the press – namely, that large shifts by users (in a time-of-use environment) will cause the on-/mid-/off-peak rates to be meaningless (or at least no longer matched with system-wide demand).   The quotation from the article is as follows: ‘Although, my theory says if everyone moves to the off-peak time, doesn’t that make it the peak time?’
A number of questions are raised by this.  One is – and I will approach it in a subsequent entry – ‘to what extent do the pricing periods match broader demand (and/or broader market prices)?  In other words, are we being charged ‘peak prices’ at the ‘toughest times’ and so on?  Again, I will look at that one in the near future.
For now, let me consider, more closely, an issue I have already touched upon in this blog – namely, the extent to which customers will shift their loads because of the changes in prices.  My ‘gut feeling’ is that the shifts in loads will be relatively small – or at least not big enough to have on- and off-peak periods exchange places – for two reasons.  First, the differences in costs are relatively modest.  As my entry entitled ‘On-peak and off-peak residential pricing’ lays out, the difference in cost from having the oven on for one hour at 6pm in the winter versus 8pm in the winter is 15 cents.  For the most part, other household dynamics will be key determinants in deciding when dinner is.  And second, not all electrical services in the household are time-flexible – you cannot, for instance, turn on and off your refrigerator, nor can you run your dishwasher before you have your meal.  Indeed, back in August 2004, I had an article entitled ‘Real-Time Pricing for Electricity:  What Difference Could it Make to Ontario Households?’ in Municipal World.  There, I published a hypothetical household’s monthly electricity consumption (1,000 kWh … the figure would be lower today), and highlighted the fact that different electrical services had different levels of time-flexibility.  That figure looked like this:

Used all the time
Used with some flexibility
(regarding time of use)
Used virtually any time
Refrigerator (100 kWh)
Chest freezer (100 kWh)
Clocks (10 kWh)

Furnace fan or central air conditioning (300 kWh)
Oven (100 kWh)
Lighting (90 kWh)
Dehumidifier or heat exchanger or heat-recovery ventilator (100 kWh)
TV, microwave, coffee maker, computers, etc. (85 kWh)
Washing machine and dryer (90 kWh)
Dishwasher (15 kWh)

Some of the values can be challenged, but it remains the case that not all electrical services can be used at whatever time.
More academically, a number have examined the so-called ‘price elasticity of demand’ with respect to electricity – that is, for every percentage increase in costs, what is the percentage decrease in use?  In the short-term, it is often argued that – in households – that value is something of the order of -0.2 or -0.3.  In other words, for every 10% increase in prices, consumption falls by 2% or 3%.  In the longer-term, as householders make investment choices to reflect new pricing realities (for instance), that value may be up towards -0.7, -0.8 or -0.9.  Recent investigations may be found a recent article in The Electricity Journal (‘Residential and Regional Electricity Consumption in the U.S. and EU: How Much Will Higher Prices Reduce CO2 Emissions?’, by Inês M. Lima Azevedo, M. Granger Morgan and Lester Lave, 24(1), January 2011) and in a recent CD Howe Institute Backgrounder (here (pp. 4-5)).  There is also a debate about the extent to which customers respond to (and understand) marginal costs (what they are paying for that ‘last unit’ – for instance, in a time-of-use environment) or average costs.
Some of the most comprehensive work on this issue has been done by Ahmad Faruqui in the United States.  His findings – see, for example, a recent summary article he co-authored in Public Utilities Fortnightly (January 2010), entitled ‘Rethinking Prices’ – suggest that our situation, with its relatively low on-/off-peak pricing ratio in a time-of-use environment, might yield a 10% reduction in on-peak consumption.   With the average household consuming 18% of its monthly 800 kWh during peak periods (or 144 kWh), then reductions will be of the order of 14.4 kWh a month – equivalent (to keep with an earlier example) to moving dinner once a week from 6pm to 8pm (in the wintertime) or not running the air-conditioner between 12 noon and 4pm once a month (in the summertime … that calculation from the IESO’s 10 Smart Meter Lane).  Research – some which we here at the University of Waterloo hope to undertake – will reveal what people actually end up doing.

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