Thomas Friedman on Energy Efficiency in the New York Times Today

Lynne Kiesling

Today’s New York Times has a column by Thomas Friedman, “Go Green And Save Money” (TimesSelect $$), on the importance of energy efficiency for both reducing costs and reducing overall resource use. In it Friedman draws attention to the crucial fact that both electricity use and prices are determined by the interaction of supply and demand, not just generation supply. He also highlights the energy efficiency proposals of Duke Energy’s Jim Rogers; this attention is worthy, because Rogers is proposing novel ways of thinking about the role of energy efficiency in this industry. In particular, Rogers emphasizes how important it is for utilities to have incentives to make the capital investments required to make large-scale energy efficiency choices available and easy for large numbers of consumers; those choices make it easier for them to reduce use, thereby leading to lower wholesale generation prices.

One important insight to draw from that point is that such capital investments will also pay off in reduced operation costs to utilities, particularly if these investments are made in technologies that are interoperable with other technologies, devices, and parts of the communication system. Interoperability is the ability of two or more networks, systems, components, devices, or applications to exchange information and to use that information effectively for action, often with little or no human intervention. Creating an intelligent interconnected network, with fluid information flows all the way to and from power plants to end-use premises, will deliver better reliability and higher throughput at lower long-term costs. Thus the potential for energy efficiency investments to reduce ultimate retail prices comes not just from reducing wholesale electricity prices, but also from enhancing information flows and reducing operating costs.

However, both Friedman and Rogers are overlooking the potential benefits that such an intelligent distributed network can deliver when it’s coupled with dynamic pricing to end-use customers. By focusing on the top-down provision of energy efficiency from the utility to the customer, both Rogers and Friedman perpetuate the centralized, control-and-manage vision of this industry as it moves into the technological, and probably carbon-constrained, future. This vision is too narrow.

Another vision exists, and in some ways it is complementary with the utility-driven vision. consider the fact that consumers are the ones who are best situated to figure out what energy uses, technologies, product bundles, and efficiency strategies work for them. Entrepreneurial retailers, who may or may not be the utility, can risk their own capital coming up with products and services that attract consumers and induce them to change their enegy use. But the crucial component in that distributed, decentralized dynamic is pricing.

Customers and retailers entering into dynamic pricing contracts that, for example, give customers access to low overnight prices and charge them higher peak prices through a real-time price, provide a distributed, decentralized approach to changing energy use behavior. And it’s an approach that gives customers the incentives to weigh their own decisions, using their own local knowledge, in ways that the utility can never access, because they cannot tap that local knowledge that individual customers possess about their own preferences and situations. Transparent, dynamic pricing enables consumers to evaluate the costs of their decisions, and provides them with incentives to take energy use and device investment decisions that reflect the true value that they place on energy efficiency.

Without dynamic retail pricing, the energy efficiency proposals that Rogers is promoting are unlikely to be particularly effective at producing sustained demand reduction. One reason why the justifiably-scorned energy efficiency and “demand-side management” programs of the 1980s were so ineffectual was that they did not provide incentives for utilities to cater to the diverse, heterogeneous ways and times that their consumers use power and could change their behavior.

Energy efficiency, digital technology, and dynamic pricing go hand in hand to optimize our resource use at the lowest feasible long-term cost, and interoperability is the grease in that information-flow system that will enable us to achieve that vision. Rogers’ proposals and Friedman’s column draw attention to an important part of what is possible.

NOTE: I also wrote about Rogers’ proposals back in March 2007, along the same lines.