Critical Peak Pricing Isn’t Ideal, But It’s A Start

Lynne Kiesling

The California PUC has directed the three investor-owned utilities in the state under its jurisdiction to develop critical peak pricing plans for summer 2005. From a Los Angeles Times article,

The California Public Utilities Commission directed the state’s three investor-owned utilities, including Edison International’s Southern California Edison Co., to install special meters and draw up “critical peak pricing” tariffs that would make electricity more expensive at times of heavy use. The higher rates could spur some commercial users to shut operations on the 15 or so days when the state might be faced with blackouts.

The pricing plan, along with beefed-up energy efficiency and conservation programs also approved by the commission Thursday, could be crucial in avoiding a crisis in Southern California this year. The recently released state Energy Action Plan predicted that the Southland could run short of power in August and September if temperatures are exceptionally high.

The new pricing plan is aimed at about 25,000 large users consuming 200 kilowatts of power at peak periods. Such large users range from office buildings and big retailers that use about 200 kilowatts to steel and cement plants that need more than 500 kilowatts when operating at full tilt, said Marcel Hawiger, an attorney with the Utility Reform Network, a San Francisco-based ratepayers advocate.

This San Diego Union-Tribune article has a better and more in-depth discussion of the move. But both articles do this move the disservice of spinning it as bad for customers, bad for large customers especially. I don’t think that is correct, particularly if the IOUs do a thoughtful job of revising their entire rate structure instead of just raising peak-hour rates.

The complaints of large customers also reflect static thinking. This pricing plan gives them an opportunity to use technology (i.e., thermal storage, voltage management) to reduce their peak use even if they can’t fully shift away from peak hours.

9 thoughts on “Critical Peak Pricing Isn’t Ideal, But It’s A Start

  1. Partial-regulation is worse than either full regulation or no regulation at all. My sense is that the biggest fear and hence risk in the minds of management at both the large consumers as well as the utilities is revisionist regulation. The devil you know is better the devil you don’t.

  2. I don’t understand why this has not been policy for a long time. We operated under something like this at Ames Research Center where we got power from WAPA. We sold our uninteruptable rights to the city of Santa Clara for a nice piece of change We also had the variable pricing structure. This was done years ago. It lead to a lot of swing and graveyard running and we did shut down during power shortages. This is lot easier for a US government facility to do than a for profit. It did lead to scheduling problems because we did not have a lot of lead time on power availablity.
    My home also had this. PGE offered lower rates if you installed the meter and as no one was home during the day so it seemed like a no brainer.
    But, as they say, the devil is in the details.

  3. “Don’t begin vast programs with half-vast ideas.”

    I realize it is a radical concept that electricity should be priced for all consumers at the cost of purchasing it + the cost of delivering it + a fair return on investment in the transmission and distribution infrastructure. Averaging peak costs and off-peak costs and allocating these costs to reduce residential / small customer prices (rates) eliminates any incentive to reduce on-peak demand on the part of any customer class. We are, therefore, where we are.

    The real costs of gigawatts of generating capacity run ~100 hours per year are not reflected in on-peak rates today; and, would not be accurately reflected even if large consumer on-peak rates were doubled or tripled. This is an even more difficult issue in California, because many of these generators will not operate at all once it starts to rain or snow again in the BPA watershed.

    However, it is also true that off-peak rates do not reflect the real costs of off-peak power production and delivery. It is interesting to note that the CPUC has not requested corresponding reductions in off-peak rates for the large customers which would pay the higher on-peak rates. Hmmm.

  4. Excellent point about the lack of reduction in off-peak rates.

    Increasing the difference between peak and off-peak rates also increases the opportunities for arbitrage using e.g. thermal storage, as Lynne noted.  But hitting industrial customers only eliminates the incentive for residential customers, who may have a lower per-KWh cost of shifting, to take what measures they can and get their fair share of the savings.

  5. I should have read TFA first:

    Ed Van Herik, a spokesman for the utility, underscored that the emergency rate plan also includes rate cuts for off-peak periods, so the company’s plan should be cost-neutral for most customers over the course of the summer.

    Good for them, they’re doing it right.

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