Energy Biz - September/October 2008 - (Page 40) Congestion Pricing Is the Solution The Power of Information BY MICHAEL PEEVEY in 2003, the city of london implemented congestion pricing. The scheme, which charges motorists a fee for driving in the city center during certain hours, was designed to reduce the serious traffic congestion that had historically plagued the city’s ancient roadways. Congestion pricing provides a simple means of bringing private and social costs into closer alignment. In London, the results have been impressive. According to a Deloitte Research study, average speeds in the city have increased 37 percent and congestion has dropped 40 percent. The electricity system, particularly in transmissionconstrained environments like California, suffers challenges similar to those in London. As with cars during rush hour, during peak periods, the true environmental and congestion costs of an individual’s electricity consumption are not reflected in the price that individual pays. In the middle of a hot summer day, when the grid is nearing capacity, the state is forced to rely on less-efficient generating units that are more costly, both in financial and environmental terms, than the baseload units the state uses to meet most of its energy needs. Furthermore, because investments in the electricity system tend to be “lumpy,” and the system must be built to support maximum demand, even if that maximum demand occurs for only a brief moment, the marginal unit of demand is extremely expensive. However, most electricity customers are not subject to prices that reflect this underlying reality. Instead customers generally face rates that, at best, encourage them to reduce total consumption, but which do little to encourage them to reduce consumption when it matters most: during peak periods. As in London, congestion pricing can provide the solution. Charging customers rates that are linked to the underlying costs of providing electricity encourages them to organize their consumption more efficiently. For example, customers who might ordinarily do their laundry in the middle of the day will under time-of-use pricing have a strong incentive to do their laundry at night when rates are lower, just as drivers 40 E n E rgyB i z making discretionary trips into the heart of London are motivated to make those trips during times when the congestion fee is not in effect. The economic costs to the consumers of such load shifting are relatively small, but the benefits to the electrical system can be tremendous. The benefits are particularly great in circumstances in which the grid is significantly constrained. During the energy crisis, wholesale prices rose to unprecedented levels as the utilities were forced to procure electricity in a market in which the supply had been artificially restricted by unscrupulous market actors. Consumers continued to use electricity as if nothing had changed, insulated and unaware of the price run-up in the wholesale market, despite the fact that, in most cases, the value they derived from that consumption was dwarfed by the astronomical prices the utilities were paying in the wholesale market. Had customers born even a small amount of the price increase at the time, demand might have been reduced significantly and the market power used to such disastrous effect by the likes of Enron could have been mitigated. Conveying this kind of pricing information, however, requires a wholesale change to our metering infrastructure. Despite the vast array of technological advancements over the past century, the meters customers rely on have remained essentially unchanged. These meters tell consumers one thing: how much energy they have consumed. They don’t tell them when they consumed it or how much it cost. In California, we have embarked on an effort to replace this antiquated infrastructure with advanced meters capable of conveying pricing information that more closely reflects actual market conditions. The deployment of this metering infrastructure will usher in profound changes in how customers perceive their relationship to the energy system and provide a platform for Michael Peevey the implementation of a variety of PhOTO By caLiFOrnia PuBLic uTiLiTiEs cOMMissiOn congestion pricing schemes. These include time-of-use rates based on the predictable daily ebb and flow of supply and demand, critical peak pricing schemes that trigger extremely high super peak prices when the system is nearing capacity limits, or real-time pricing in which rates fluctuate moment to moment based on actual market conditions. In addition, by focusing on a standardized platform that incorporates robust communication capabilities, we believe we can jump-start the market for intelligent appliances that can be programmed to respond autonomously to pricing signals, shutting off or cycling during high-cost periods. Such communication capabilities will September/October 2008
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