Lynne Kiesling
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.
For what it is worth, my experience with residential customers and variable pricing suggests that this can indeed be a worthwhile tool to manage demand.
For a while in the 1990s I was a manufacturer’s rep for a company that made geothermal heating and cooling systems. Some utilties — primarily rural electric cooperatives — used variable pricing as an incentive to get customers to install geothermal systems, which use much less energy than conventional space conditioning systems (and which, in a pinch, the utility can control to manage peak demand. Where reliable installing contractors existed, variable pricing proved an attractive incentive, even though from the customer’s standpoint the lower energy consumption of the geothermal system meant that a lower electric rate didn’t save them huge amounts of money.
However, there were some important caveats. First, in the absence of reliable installing contractors variable pricing was not an attractive incentive. Too much insistence by the utility on its right to control the heating system during peak hours could also make variable pricing less attractive. What this suggests is that variable pricing is most attractive if its application can be kept simple and obstacles to taking advantage of it are minimized.
Further, variable pricing as a demand management tool was unattractive to most investor-owned utilities. During the 1990s these utilities sought to reduce their manpower costs, which meant laying off people charged with working with residential customers. Moreover, where I worked (Wisconsin) most IOUs’ demand peaked in summer — because of their high commercial and industrial load. Residential loads in Wisconsin tend to peak in winter, obviously, which made the residential load-dominated co-ops interested in a system that could shave their peak demands. Geothermal system had only modest effect on summer peak loads because residential cooling in Wisconsin does not demand much energy.
Finally, geothermal systems run on electricity, and most IOUs in Wisconsin also market natural gas. It was much easier for them to promote fuel-switching to gas furnaces than it was to promote greater energy efficiency for customers using electric systems. What this suggests is that variable pricing to be attractive doesn’t just have to be easy for the residential customer — it has to be easy for the utility. If other means of managing utility demand peaks exist, those are the ones utilities will use.