Faster, smarter, cheaper: Part 1, why it’s better
What’s the price of a hotel room? Depends on when you want to stay.
Boldly staying where no one stayed before
What’s the price of a tomato or an ear of corn? Depends on what month it is, and how the crop is doing.
What do they cost? Depends which month it is
We’re used to price variability in our daily lives because associated with that price variability is a wide range of choice: we can buy green beans instead of corn, or we can stay in a different hotel. Yet in some other commodities, like the price of gasoline, we become irate at price volatility – perhaps because when you’re out of gas, you have a great sense of urgency about refilling the tank, and hence you feel exploited when the price is higher than you wanted it to be. Might this be the instinctive antipathy so many of us have to the possibility of variably pricing residential electricity or energy, as revealed in this Wall Street Journal article:
One of modern life’s most durable features—fixed-price electricity—is slowly being pushed to the sidelines, a creeping change that will influence such things as what time millions of Americans cook dinner and what appliances they buy.
It’s called load management, and we want to do it. More to the point, dynamic energy pricing in residential property is inevitable, so we might as well anticipate it.
Efficient technology is like the flu – sooner or later everyone gets it.
– Science fiction author Alexander Jablokov
Alex Jablokov, who got it before most of us did
When the price is fixed, customers exploit demand optionality, nowhere better demonstrated that in ticket scalping, which for some reason infuriates politicians, even tough it’s the simplest and most readily comprehensible example of merchant banking most of us ever encounter.
I provide a service, and that service costs money
When the technology improves, variable pricing becomes feasible:
Driving the change is the rollout of so-called smart meters, which can transmit data on how much power is being used at any given time. That gives utilities the ability to charge more for electricity at peak times and less during lulls.
As I wrote in Don’t get smart with me(ter), when the price is variable, customers respond with consumption optionality.
When people know what they are doing, they do it smarter. That’s the principle behind biofeedback.
As you can see, reading AHI blogs makes you happier
When people know what they are spending, they usually spend less. Of the three main costs of sheltering a family – cost of occupancy, cost of transportation (to job and leisure), and cost of operations – people make big choices bout the first two, how and where to live, but the third is ruled by a host of small choices to which people are curiously indifferent, mainly because they cannot perceive that switching on this light or that boom-box means thus-and-such amount of money.
What if we gave homeowners real-time insight into their utility spending?
I’m old enough to remember when phone rates went down after 7:00 pm and on weekends, so we’d save our long personal heart-to-heart talks for those times. [Yes, my children, and in the pre-internet era, we could go days not knowing who won a key football game, and scanning the agate type in the International Herald Tribune for compressed box scores. – Ed.]
Time was, this was fast communication
Variable pricing enables producers to deliver production flexibility:
Spreading out electricity consumption more evenly across the day leads to more efficient use of power plants and lower emissions.
Right – as disinterested citizens, we all should be for this, as it gives us the same quality of life at lowe energy consumption.
Advanced meters “put consumers in charge of an expense that’s often thousands of dollars a year and in ways that were never possible before,” said John Geary, vice president of innovation for TXU Energy, a Texas power seller. [Except it's ironic that XU's home page says "Straightforward pricing & no variable rate plans." – Ed.]
When a price is variable, a monopolist vendor (like a utility company) can exploit information asymmetry to gouge or bamboozle the customer, so to build customer trust, it’s imperative to have pricing transparency (customers always able to see the marginal price of an increment of consumption) and pricing predictability.
Note point two: transparent pricing
“They won’t be flying blind anymore.”
Nor will power sellers, as utilities like to style themselves now.
Utilities, economists and even behavioral psychologists are still trying to figure out the best way to convince [Persuade, Strunk and White – Ed.] consumers to cut their power at the right time. They worry that folks will be in for a jolt if they suddenly are exposed to wildly fluctuating prices—possibly prompting a smart-meter backlash.
Why not just put a little real-time consumption graphic on your computer desktop or screensaver?
Just watch the needles …
If prices don’t change, it would undercut the purpose of rolling out the costly smart meters in the first place.
Obviously prices are going to change. Prices change all the time. What will also change is the structure of pricing.
“Regulators are conflicted about whether to protect people from volatile prices or let people experience them so they change their habits,” said Stanford University economist Frank Wolak, an expert on energy markets.
Analyzing conflicted regulators: Wolak
Consumers have mixed feelings, too. Some say it feels coercive.
You fool, all pricing is coercive. It’s called incentivizing.
I pity the fool who can’t read his utility bill
Houston-based Reliant Energy Inc. started offering a rate plan this year that has two prices for electricity in the winter and three in the summer. The highest price occurs from 4 p.m. to 6 p.m. in the summer.
As long as you know what you’re paying …
Dennis Banks, a retired computer database designer, signed up for the new Reliant plan because utility bills for his 1,350-square-foot home in Richardson, Texas, have run as high as $600 a month. He has cut his bills in half, he said, by:
 Cooking dinner before 4 p.m., when higher prices kick in.
 Running his electric tools for a new furniture-refinishing business when juice is cheapest.
The customer, being in charge of his consumption, shifts his workload symbiotically with the utility’s desire to cut its peak load production. Everybody is better off, most especially including all other Houstonians, who benefit from lower aggregate production.
“I’ve had months where the power bill is as low as a hundred dollars,” he said. “That’s a first.”
He likes the weekly emails he gets from Reliant that tell him how much power he has used and projecting his monthly bill.
You have a gas gauge; you have a tachometer.
You always want to know what you’re running
Watching these enables you to modulate your speed and optimize your gas mileage.
If you want to, that is.
You need an energy meter.
“If I need to squeeze my nickels, I change what I’m doing,” [Dennis Banks] said.
What could possibly go wrong?
I get hot under the collar just thinking about it
[Continued tomorrow in Part 2.]