Today the Chicago Sun-Times is running a story by Mary Wisniewski about the Energy Smart Pricing Plan, a residential demand response program that has been running in northern Illinois for two years.
One of our many long-cherished preconceptions of the demand for electric power services is that residential customers do not respond to variable pricing. Whether because it’s too much of a hassle to be worth, or the equipment is costly, or the price differentials across the day are not big enough, there’s always some sort of rationale for dismissing residential demand response.
Yet this well-designed and successful program is a strong piece of evidence indicating that we should reconsider, and change, that preconception. Residential customers of all different types (income, family size, type of residence) have found the ability to change their behavior in the face of clearer and more transparent price information to be both empowering and financially beneficial.
Viewing the success of this program in conjunction with our concerns about electric power network reliability challenges another preconception – even if residential customers do respond, their changes will be so small that they cannot affect the system in any meaningful way. Nothing can be further from the truth. One thing we learn from studying a complex dynamic system like an electric power network when it is close to capacity is that it is very nonlinear. Put another way, small decreases in load can have large effects on the stability and reliability of the system, particularly if those load decreases occur at times when the system is close to capacity.
Prices communicate information to customers about the relative scarcity of supply and the relative importance they should place on their own consumption. That is how prices serve as an important tool for network reliability, which is why even small residential customers seeing prices that reflect actual opportunity costs can provide such a stabilizing force on the grid.
I also commented on the Energy Smart Pricing Plan in February 2004.