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February 19, 2007

Time of Day Pricing for Electricity

It makes absolutely no sense to charge the same amount per kilowatt hour for peak electrical use as we charge for off-peak consumption.  Peak power generation is much more expensive than off-peak – often twice as much and sometimes much more.  Peak power almost always depends on fossil fuels.  And peak power usage is what drives the requirement for more generating and transmitting capacity.

If we went to time of day (TOD) metering for electricity, we could reduce electric bills for most homeowners without just shifting the cost to someone else.  That works because consumers who reduce their peak use save their utilities lots of money (in most places).  TOD metering might make alternative energy, particularly small-scale solar, financially attractive without subsidy. TOD metering would lead to better financial decisions by all users of power; it would help reduce the balance of payments deficit; and it makes electric cars more practical; it helps paves the way to a much more electric economy than we have today.

TOD metering won’t save the world all by itself; but it’s a damned good start and a not very difficult first step.

The following charts are from Vermont’s 2005 power plan.  Local conditions vary but they are a good indication of why TOD pricing (which is not generally done in Vermont now) is such a good idea.  The chart immediately below shows how wholesale prices vary during two normal days:


Peak costs for power during the afternoon on both days was 60% higher than the daily lows.  On a bad day, the difference is much greater:



What’s happening here is that Vermont buys power from the New England Power Pool during peak periods.  The pool generates its peak capacity by firing up natural gas generating capability.  As you can see below, the wholesale rate for power in this region is almost a direct function of the price of natural gas:


It’s not that all electricity is generated from gas.  In fact one third of the electricity Vermont uses comes from nuclear Vermont Yankee and another third from Hydro Quebec. But almost all the demand above baseline – the extra peak demand – is satisfied by spooling up the gas-fired plants so the marginal cost, the cost of an extra kilowatt hour, is the cost of generating that kilowatt hour with gas.

Storing electricity in huge quantities is very inefficient (more about that in future posts, though), but storing dirty laundry or dirty dishes until after six PM isn’t very hard at all. Sure, we could all be good citizens and do that anyway but the rational incentive of TOD metering would get better results than volunteer efforts. Moreover TOD metering would give those who are hurt be high electric bills an opportunity to do something about them – and perhaps even a chance to substitute low-cost off-peak electricity for gas or oil in space or hot water heating applications. Think how good that would be for energy independence and reducing greenhouse gas emissions.

Electric prices at wholesale are already on a minute by minute basis.  Consumers certainly don’t need all the complexity of a chaotic spot market for electricity at their meters. But consumers do deserve a chance to help reduce both the peak demand and their own bills. That’s just one of the reasons we need TOD pricing for electricity.

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