EDF and UCLA have created an interesting visual presentation on the potential for solar power and energy savings in the LA county, overlaid with socio-economic characteristics. (But I have some trouble with the representation of a few West LA communities as disadvantaged with high health risk–is that the UCLA campus?
An insightful discussion about the new type of consumers that utilities will be facing–consumers who now expect to have customized experiences for no added cost.
One potential diversion though: The Brookings Institute description of Millenials–socially conscious, distrust of big companies, more favorable to government regulation–was used to describe the Baby Boomers 50 years ago. The actual changes didn’t really pan out that way. How the marketplace evolves is still uncertain.
The Atlantic reviewed Cass Sunstein’s latest book on using public policy to redirect individual’s choices. Some complain that the government shouldn’t be influencing daily life in this manner. However, we already have many other private groups, most businesses, attempting to redirect daily decisions in their favor. But there at least good reasons why we might decide as a larger society to instill counter nudges that lead to overall improved economic decisions and outcomes.
The first is moral hazard where two parties have different amounts of information or levels of incentives. A classic example is a real estate agent and a home buyer. The agent is paid on the percentage of the house price and knows much more about the local market. These conspire to lead to a higher house price on average than would occur in a frictionless market.
The second is the principal-agent problem. In this case, the economic decision-maker is not the actual consumer or producer in the transaction. The health care industry is one classic case where patients defer most of their decisions to a physician, who also happens to be the benefiting service provider. Another case is the split-incentives in the rental housing market where the landlord could make energy-efficiency investments that reduce a tenant’s energy bill, but the tenant actually pays the bill. (I’ll write more on this in a future post.)
Some of this might not be needed with acted like the mathematical automaton that Milton Friedman envisioned, but we do have significant limitations on our abilities to make rational economic decisions. A decentralized price system is probably the best means of allocating use of scarce resources among us. Yet that doesn’t mean that society, through its government, shouldn’t agree to manipulate that price system to arrive at a more preferred set of individual decisions. Thus we should nudge and counter nudge as Sunstein suggests.
Sunil Paul of Side Car wrote on LinkedIn about how the emergence of the “peer economy” has allowed the emergence of new economic transactions. Side Car uses a smartphone app much like Uber and Lyft to connect riders with drivers to connect for quickly arranged trips.
Paul writes: “The peer economy is the growing business segment of transactions between individuals – one person to another – without a middleman to manage and package it. Think eBay for everything. ” He goes on to say, “(t)o win in the emerging peer economy, it’s important for companies and organizations to listen to what is possible with the technology and connect that with the needs of consumers and businesses. ”
The electricity industry appears to be on the verge of entering the transition to the peer economy with self-sustaining households and neighborhood microgrids. The single largest barrier is institutional, not technological, from the incumbent utility industry. We need to consider innovative strategies and policies to have them embrace this transition rather than resist it.
At M.Cubed we’re working on those solutions–the objective is not to try to bull over the utilities because that is a sure loser in the political world. There are ways for change the perspective so that the the utilities can see their advantage. We did that for the mobilehome park industry in California when we got PG&E to back conversion of aging master-metered electricity and gas systems to utility ownership. Look for more from us on this topic in the near future.
I just got back from an annual conference put on by the Center for Research in Regulated Industries. It brings together many of the applied economists and policy analysts working in California’s electricity industry. I presented a paper on reconsidering rate design.
Customers are often left out of the conversation about how to move forward into the new energy future, as they were at the recent CAISO Symposium where not a single customer representative was included in the “Town Hall Meeting.” Current retail rate tariffs seem to be designed with little thought about how customers would prefer to pay for their energy, and what might best encourage consumer energy management. And when customers are asked to take on more risk or cost to address energy needs, their revenue responsibility is often unchanged.
How should utilities align their rates and tariffs to fit customers’ preferences? Utilities both face a rapidly evolving energy marketplace and have available to them a larger portfolio of technologies to provide more services and to measure usage across different dimensions. One important step that utilities could take is to offer customers the same variety of contracts as the utilities make with their suppliers, so that rates mirror the power market.
Customers have a range of preferences, and some prefer to be more innovative or risk takers than others. To better match the market, should utilities offer a range of tariffs, and even allow customers to construct a portfolio of rates that allow a mix of hedging strategies? How should the costs be allocated equitably to customers to reflect the varying risks in those portfolios? How should the benefits of lower costs be allocated between the active and passive customers? The new metering infrastructure also provides opportunities for different billing strategies.
How should time varying rate (TVR) periods be structured to adapt to the potential shift over time when peak meter loads occur? Should the periods be defined by utility-side resources or the combination with customer-side resources? Is the meter an arbitrary division for setting the price? What is the balance between rate stability to encourage customer investment versus matching changing system costs? Should the utilities offer different TVR periods depending on the desired incentives for customer response?
In developing costs, how should utilities and commissions consider how resources are added, and in what capacity? Renewables are now part of the incremental resources for “new” load, and we can no longer rely on the assumption that fossil fuels are the marginal resource 100% of the time.
The “super off-peak” rate offered by Southern California Edison (SCE) to agricultural customers is one example of how a rate can be constructed to encourage customer participation in autonomous ongoing energy management. Are the incentives appropriate for that rate? Over what term should these rates be set given customer investment?
If you’re interested in this paper, drop me a line and I’ll send it along.
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