Lynne Kiesling
While I am musing on the problems with the traditional regulatory model in electricity, as in my prior renewables feed-in reverse auction post, I am going to pile on (yes, it is like shooting fish in a barrel, but it’s the first day after a long holiday weekend, so cut me some slack, OK?). I was simultaneously excited and appalled on Friday when I read this Financial Times article about how consumers are changing their electricity consumption. More and more people are investing in energy efficiency upgrades to houses and buildings, replacing devices and appliances with ones that deliver the same functionality while using less electricity, and consequently reducing their electricity consumption. Increases economic efficiency, good for the longevity of the planet, individuals save money and feel good about themselves and how they are choosing to live their lives. So far, so good.
But here’s the meat of the article:
Wholesale power demand was down 15.3 per cent in the second quarter compared to last year, according to data compiled by Credit Suisse Securities. Total retail demand was down 5.4 per cent, with industrial demand plunging 14.7 per cent, commercial demand falling 3.5 per cent and residential demand dropping 1.7 per cent. …
“There is a mindset change in consumers,” said John Berger, chief executive of Standard Renewable Energy, which sells energy audits and solar energy. Those who follow the advice in energy audits typically reduce power demand 20-30 per cent. “The demand for that service is going up exponentially,” he said.
The company’s energy efficiency and solar businesses have both grown about 20 per cent per month in the past six months.
The impact on utilities’ bottom lines has led to talk about forcing consumers to pay a flat fee for electricity, so utilities will be profitable even if power demand continues to drop.
“It’s desperate behaviour,” Mr Berger said.
Let me just pull that out and emphasize it, in case you missed it because it’s the first day back after a long holiday weekend:
The impact on utilities’ bottom lines has led to talk about forcing consumers to pay a flat fee for electricity, so utilities will be profitable even if power demand continues to drop.
Yes, you read that right. Price signals and other intrinsic motivators are leading individuals to increase their energy efficiency, conserve, and (if they are fortunate enough to be able to choose a dynamic pricing contract) shift their consumption from peak hours to off-peak hours. And what’s the regulated retail utility response to this salutary change? Force consumers to pay even if they don’t buy their services. Furthermore, if they force (force!) consumers to pay a flat fee, do you think they are still going to have these incentives to invest in energy-efficient technologies? That’s only the case for consumers who have very, very strong intrinsic motivation because they want deeply to reduce resource use and environmental distress.
If you don’t realize that retail economic regulation of electricity service is pernicious and counter-productive, you have not been paying attention.
At its core, this atrocious incentive problem is a direct, predictable consequence of cost-recovery-based retail rate regulation. Regulated utilities are legally entitled to recover all of the costs that the regulators allow, plus a markup for their regulated rate of return. They are guaranteed that by law. That guarantee means that their business model is rigid, inflexible, and maladaptive in the face of the kinds of changes described in the FT article that we are all seeing around us and engaging in ourselves. And instead of using this fall in profits as a signal, as a way for them to learn that they should do.things.differently, they want to resort to the old, traditional, top-down regulate-and-control model to force consumers to pay them, even if they don’t continue to consume as much of their service.
Not only is this economically inefficient and environmentally deleterious, it’s a disgusting demonstration of the corrupting effects of political processes. Retail electricity regulation based on cost recovery: EPIC FAIL.
