Which market is the most similar to electricity: Ocean City hotel rooms or gasoline?
As we move to deregulated electricity markets, it is worth studying how private markets price similar goods and how the economics of electricity vary from other types of energy. Some of the key characteristics impacting electricity use are that it can?t be stored and demand for it fluctuates highly ? much like a beachfront hotel room.
Gasoline is fuel (stored energy) that is transformed into energy by your car when you need it. In contrast, consumers purchase energy ? not stored energy ? when they buy electricity, and suppliers must produce the energy at exactly the time consumers wish to use it.
Demand for gasoline varies, but inventories held in cars? gas tanks and corporate storage tanks mitigate the short-run variation. No inventories exist to buffer demand fluctuations for electricity. The spike in energy traffic flowing through our power lines in the late afternoon and evening (especially on hot summer days) may be greater than the rush hour spike in beltway traffic or a holiday weekend at the beach.
A room at the Ocean City Holiday Inn costs $250 a night in July, $150 in September, and about $65 in October. My kids would love to go this summer, but their frugal father is making them wait until fall. In wholesale electricity markets, where utilities buy the electricity they supply consumers, the price of electricity can vary this much and more over the course of a single day. Unlike bargain-hunting vacation shoppers, electricity consumers are ignorant of price fluctuations. Bills average prices and show a single rate.
Low-cost electric meter technology already exists for time-of-use billing and has worked well in some areas. And consumers are used to the idea of paying more at peak times ? for their cell phone minutes, hotel rooms and airline tickets, among other services and products.
Small reductions in peak-time electricity use driven by higher peak-time rates can lead to reductions in the overall cost of electricity as less power is purchased from high-cost peak generators. It is easier for consumers to shift electricity use than they realize, and some peak-time use could be eliminated all together if people had an incentive to pay attention.
For example, your dishwasher probably has a delay timer you have never used. Your dryer works just as well in the morning as the afternoon. Do you really need to have those lights on at 4 in the afternoon?
Some environmentalists and newspaper columnists have argued for tiered rates based on the total amount of electricity used ? not when it is used. Designed to punish “energy hogs,” it is less effective than time-of-use rates in lowering electricity costs, is unfair, and creates some odd incentives.
Why should my family of four with two refrigerators and heavily-used kitchen and home office pay higher electricity rates than a single guy with one fridge and an oven he doesn?t use? Is my family really more wasteful than the bachelor guy or do we just use more energy at home? Time-of-use rates encourage us to lower energy costs by baking in the morning and running the dryer overnight, whereas “energy hog” rates encourage us to drive to the bakery and dry cleaners.
Time-of-use electricity rates expose consumers to real market prices and increase the overall efficiency of the electricity system. It encourages conservation when it is most important, reduces overall electricity consumption and energy costs, and treats everyone fairly.
Jeffrey A. Michael is associate dean, honors college and associate professor, economics at Towson University. He can be reached at [email protected].
