Tuesday, October 4, 2011

Electricity costs for smaller and larger households

Regular economics commentator Frances Woolley turns her sights to electricity in a recent posting (‘http://www.theglobeandmail.com/report-on-business/economy/economy-lab/frances-woolley/why-ontarians-arent-saving-money-with-smart-meters/article2190147/’, The Globe and Mail, 4 October 2011).  I enjoyed much of her argument, but I will ‘dig into’ one aspect – and by doing so, return to a theme I have picked up in the past in this blog.
More specifically, she writes:  ‘ … Ontario’s old regulated price plans favoured small households over larger families. Consumers paid a higher price for power if they used more than a certain amount each month. So, for example, a one-person household consuming 400 kWh per month paid 6.8 ¢/kWh under the May 2011 rate schedule, while a four-person household consuming 300 kWh per person paid, on average, 8 per cent more, or 7.35 ¢/kWh.’  I agree with the specific statements, but take issue with some of the details.
She is comparing a ‘summer’ consumption of 400 kWh (one-person household) in a month with one of 1,200 kWh in a month (four-person household).  And, yes, under the two-tier system, the difference in the ‘commodity cost’ would be as she writes:  for the smaller household, all 400 kWh would be under the ‘summer threshold’ of 600 kWh and thus 6.8 cents/kWh; while the first half (600 kWh) of the larger household’s electricity consumption would be at 6.8 cents/kWh, and the second half (600 kWh) at 7.9 cents/kWh, to give an average of 7.35 cents/kWh.  My issue, however, is that these are not the ‘costs’ to the consumer – or the price that would be paid.  Instead, one must look at the total charges.
Using Hydro Ottawa as the service territory in the Ontario Energy Board’s bill calculator (Prof. Woolley is at Carleton University), I put in the consumption patterns, and got numbers as follows:

One-person household
Four-person household
Consumption in a summer month
400 kWh
1,200 kWh
Commodity charges
Regulatory charges
Debt retirement charge
Clean Energy Benefit
14.44 cents
13.28 cents

Two points to be taken from this.  First, it is important to flag that ‘commodity charges’ – though important – are not the ‘cost’ to the consumer.  And second, differences in commodity charges will not necessarily translate (‘exactly’) into differences in these final costs to the consumer.  Indeed, in the example above, the difference in the ‘per kWh’ cost to the consumer is not ‘8%’ (the 7.35 over 6.8), but instead is really ‘MINUS 9%’ (8.7% results from 14.44 over 13.28) -- that is, the larger household actually has the smaller unit cost for electricity.  Given that 'fixed charges' (reflected in delivery charges) are relatively large, and many of them fixed, regardless of one's consumption, these can overwhelm 'per kWh' calculations.  Therefore, while Woolley’s attention to distributional impacts is most welcomed -- and the ways in which smaller households and larger households will be affected by a move to time-of-use pricing is worth investigating further -- we should reflect further upon whether the difference in commodity costs for smaller and larger households in the conventional 'two-tier' system really told us the full story. 

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