The thing about summer is that when it gets very hot, everybody cranks up their air conditioning. And not just that: They all do it at the same time.
The consequences of this reality, which we rarely think about, are massive for the electric grid. Several days a year, temperatures shoot way up and in the afternoon through early evening, electricity demand spikes. Electricity on the wholesale markets becomes dramatically more costly at these times, because utilities have to turn on backup or “peaker” plants to bring more capacity online. The whole system strains, and sometimes, power outages occur.
Even if they don’t, the peaker plants can not only cause pollution, but drive up everybody’s energy bills. That’s because whether or not utility companies actually charge customers more per kilowatt hour of electricity during hours of peak demand, it definitely costs them more to generate. And that added cost pushes bills higher.
“For many utilities, 1 percent of the hours of the year account for as much as 10 percent of their peak load,” explains Ahmad Faruqui, a principal with the Brattle Group who focuses on the utility industry. However, for a long time, most people in the United States have paid a “flat” rate for electricity that does not reflect the widely varying cost of what it actually takes to generate it.
But what if it didn’t work this way at all? For a long time, economists and electricity experts have been pointing out that if people actually paid a more realistic price for using power at times of peak demand, then not only might they use less of it, but everybody would pay less overall — and the environment would benefit to boot.
This idea of “smart pricing” — which goes by a variety of more technical names, each of which has a slightly different meaning, including “real time pricing” and “critical peak pricing”— has also become much more feasible of late thanks to the ever-growing deployment of millions of smart meters across the nation. These meters let power companies — and, potentially, you — know exactly how much power homes are using at hourly or even more frequent intervals. So a key informational and technological roadblock that has held back “smart pricing” is quickly fading into history.
[Why 50 million smart meters still haven’t fixed America’s energy habits]
Nonetheless, there still appears to be relatively little smart pricing out there. A 2014 study by the Edison Foundation Institute for Electric Innovation found that although there are some 50 million smart meters now deployed in the United States, only 8 million people have access to a “smart pricing” program — and of course, the number of people actually participating in one is even lower.
It’s “a huge neglected opportunity,” says the Brattle Group’s Faruqui, who has long made the case for smart or dynamic pricing. Not only for us all to use less energy, but also for us to pay less for it. “The way customers save money on their bills” in smart pricing programs, he explains, is that “they lower their usage during the expensive hours, and some of that usage is shifted to the off peak hours, which are less expensive.”
To see how it can work, consider one of the most praised smart-pricing programs out there — Oklahoma Gas and Electric’s “Smart Hours” program. In the summer, from 2 to 7 p.m., the program has a “peak hours” period when prices per kilowatt hour of electricity can shoot up dramatically. But customers get advanced notice, the day before, of what the price will be — and also several hour notices of “critical events” when demand will truly surge. Meanwhile, prices in regular hours are cut by half.
Thus, all people have to do is plan their lives a little bit differently — not using as many appliances during the peak period, setting the thermostat higher and paying less money overall. It doesn’t hurt that signing up for the program often comes with a smart thermostat and a home energy kit that helps you use less power. Oklahoma Gas & Electric claims that last summer, “over 99% of SmartHours customers saved money.”
Moreover, this type of program will reportedly help the company put off until 2020 having to build a new power plant to deal with peak demand.
It’s not the only approach — the D.C. and Maryland utilities Pepco and Baltimore Gas and Electric offer what is sometimes called a “peak time rebate,” giving individuals a credit if they use less power at peak times. Here, notes Faruqui, there’s no penalty or higher cost for using more energy at that critical moment — there’s just a potential benefit for using less. “It’s not a carrot and stick program, just a carrot program,” he says.
But it seems to work: In the summer of 2013, Baltimore Gas and Electric customers saved $ 7 million through a peak time rebate program that was amplified by digital communications with 315,000 of the company’s customers enabled by Opower, a firm that works with utilities to facilitate these kinds of customer programs.
California utility Pacific Gas and Electric also has a smart pricing programs — as of 2013, PG&E had over 100,000 customers subscribed. But participation in these kinds of plans is still relatively rare across the country — which means, so are the benefits.
Faruqui calculates that with every U.S. customer on not only a smart meter but also a smart pricing plan, $ 7 billion in total electricity costs to customers could be saved. “It adds up,” he says.
Granted, there are many fears about smart pricing, including people accidentally racking up gigantic bills — much like if you go way over on your cellphone plan’s roaming charges, or if you take Uber a long distance during a period of high surge pricing.
But the counterargument to such concerns is that we’re becoming a much, much more wired world, in which homes increasingly have communicating devices that will let us know what energy costs at a given time — and in which power companies will send us pricing updates straight to our smartphones. So people can and will learn and adapt to this stuff.
Like every transition, it won’t be a seamless one. But if you just consider that you’re probably paying more now for power than you might otherwise have to, and that the whole system would work better if you had a choice to do otherwise, then “smart” pricing starts to sound very appealing indeed.
Chris Mooney reports on science and the environment.