I received the following thoughtful analysis from Mike Giberson, an independent energy industry analyst who has been working with energy regulatory policy issues for many years. Recently, Mike returned to graduate study in economics at George Mason University to study market design at the Interdisciplinary Center for Economic Science. The more I reread his points, the more strongly I agree with them. Demand-side management (DSM) program’s like PSE’s are just baby steps, and by tentatively going only part way can doom themselves to either irrelevance or failure.
Anyway, here’s Mike’s argument; more from me later.
Here is another news story on the topic, this one from the Seattle Times:
I’ve been wondering how to interpret PSE’s results. By all accounts PSE was enthusiastic about the program and gave it their best efforts (unlike the perfunctory treatment a utility may give to DSM programs intended mainly to satisfy regulatory interest in “doing something” about energy efficiency). Yet the article suggests the program may be failing, and concludes: “Given the experience of some other states that have tried time-of-use programs, the results in the Puget Sound region are not surprising.”
From an analytic standpoint, maybe it is too soon to tell whether the program is failing — all the data is not in. As a practical matter, the program is failing. Since obtaining the quarterly reports showing projected net savings, customers have been quitting the program in droves (more than 1,000 a day). From October 2001 though June 2002, PSE lost 2.3 million dollars on the program. Yet the news story also reports that consumers on the program shifted an average of between 5 and 6 percent to off-peak hours.
Before jumping to conclusions, let’s consider the possible conclusions to jump to:
1. Residential consumers are too small to supply an economical demand response – the administrative costs per customer may just be too high to produce net benefits. Of course, only the most reactionary would say such a thing could never work. But given reasonably expected costs and benefits over the near term, perhaps it is more reasonable to invest one’s hopes in other places (i.e., commercial and industrial demand response, with residential consumers as a ‘free-riding beneficiary’ of better functioning markets).
2. TOU rates aren’t “good enough” for real demand response – on the other side, some RTP enthusiasts say that TOU rates are still regulated rates and hence, no surprise, they don’t work like prices.
3. Too soon to tell – the analyst in me says more data is needed. (How much has the utility saved from the shifting of consumption off-peak? Note some savings are longer in coming, as in avoided construction in the future from slower growth in consumption in the meantime.) More practically speaking, most new ventures “lose money” at the start. Lots of learning has to go on, customers make adaptations over time to time-sensitive rates (buy a dishwasher with a timer function v. buying more efficient windows).
4. Maybe the program was useful during “crisis” times, but not during normal times – giving the expense of deploying a program like this, if it only pays off during times of extraordinary prices, then it probably isn’t sustainable.
5. Entrepreneurs haven’t been freed to explore the value-proposition space in the market – Well, this is true. We are not even in the realm of a competitive supplier of electricity in the PSE case. This is a regulated firm, offering an optional short-term regulated rate program, subjected to constant regulatory oversight from the beginning. Like #2 above, the “rates are still regulated rates.”
There are other possible conclusions towards which you might jump.
Of these five, I think #1, #3, and #4 are probably right. I like #2 and #5, too.
I think one lesson to draw from the experience in the comment in #1: “But given reasonably expected costs and benefits over the near term, perhaps it is more reasonable to invest one’s hopes in other places (i.e., commercial and industrial demand response, with residential consumers as a ‘free-riding beneficiary’ of better functioning markets).”