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Peak electricity pricing can save you money

Severin Borenstein, professor of business | April 29, 2013

Here in California, summer weather is quickly approaching and once again parts of the state are facing potential electricity shortages. This year the biggest concern is in Southern California due primarily to the continued outage at the San Onofre Nuclear Generation Station (SONGS).  If there are shortages, they are likely to occur on the hottest days of the year when air-conditioning demand is at its peak. Research by many economists (including Wolak, Ida/Ito/Tanaka, Jessoe/Rapson, and many others) has shown that a very effective way to cut peak demand is through “critical peak pricing” programs.

These programs go by different names at different utilities, including SmartRate,  SmartCents, Peak Day Pricing, and Summer Advantage Incentive.  They give you a discount on power most hours of most days, but charge a substantial premium for power on the highest demand days of the summer.  Many utilities now have such programs, though they are not always well advertised or promoted.

In nearly all cases for residential customers, they are opt-in, so you have to search them out and figure out how to sign up. I wrote a paper[1] last year that reviewed effective and equitable approaches to implementing opt-in critical peak pricing and estimated the potential impacts on different types of residential customers in the service territories of PG&E and Southern California Edison.

power linesIf you are a PG&E customer in the Bay Area (or other milder climate where you don’t have A/C or don’t use it much), their SmartRate will almost surely save you money.  At my house in Orinda (east of Berkeley and somewhat warmer in the summer), we signed up for it last year.  We saved about $40 on electricity, about 13% over the 6 months of the program (May through October). We did avoid running laundry or the dishwasher between 2 PM and 7 PM during the 15 critical peak days that were called, but our adjustments were fairly minor.

If you live in the Bay Area and have not signed up, I urge you to do so on the SmartRate SmartRate( website. You can’t really lose during the first year, because the PG&E program has “bill protection,” which guarantees that your electricity bill in your first year on the program will be no higher than it would have been under the standard rate.

PG&E’s program isn’t perfect:

–  I’d like to see them do “shadow billing”, showing on every bill (regardless of which tariff the customer is on) how much the customer paid under the tariff they are on and how much they would have paid if they had switched to an alternative tariff.

–  I would also like to see PG&E get more flexibility from the regulator (the California Public Utilities Commission) on how many critical peak days they can call each year.  A fixed (or maximum) number of calls each summer creates perverse incentives for the utility to call critical peaks on days that are not that hot, or to hold back on hot days in case they run into even hotter days later in the summer.

I discuss these and other issues at greater length in my paper on opt-in critical peak pricing.

Saving money is fine, but the real reason I want you to sign up is to get more direct experiences with critical peak pricing that can shape the way utilities and policymakers design such programs.

If you have already signed up for PG&E’s (or any other utility’s) critical peak pricing program, I welcome your comments about the program.  And if you haven’t signed up yet, particularly if you live in the Bay Area, it is time to start saving money and helping to reduce the stress on the grid during peak times.


[1] The final version was published as “Effective and Equitable Adoption of Opt-In Residential Dynamic Electricity Pricing,” Review of Industrial Organization, March 2013, Volume 42, Issue 2, pp. 127-160.

Cross-posted from Energy Economics Exchange (tag line: Research that Informs Business and Social Policy), a blog of the Energy Institute at Haas.

Comments to “Peak electricity pricing can save you money

  1. It is a bad thing when these situations happen, in my country about 15 years ago we had blackouts very often, now I am studying electrical engineering in the and this information is very useful to discuss it with my colleagues and teachers … I hope you keep uploading a lot of information

  2. One way to handle peak demand is to offer clever pricing schemes and let consumers figure out how to shift loads to non-peak periods. Another option is to study what’s causing the peaks and see if there is some way to ameliorate the peak.

    Good news. LBNL is studying window attachments as a means for reducing electrical demand for air conditioning during summers. The window attachments have the ability to reduce infrared heating from sunlight so that air conditioning load is reduced. With such a reduction in demand it should be possible to save $, reduce the peak demand as the utility sees it, and experience no discomfort through it all.

  3. Living in a 400 square foot apartment without air conditioning or a dishwasher, I use very little electricity any time of day in the summer. As it is, the most electricity I use is for lights (all on fluorescent bulbs), the fridge, and charging my smartphone, laptop, and running a modem. I might use my stereo once a day for an hour, too.

    I would like to see “possible scenarios” on PG&E’s website to evaluate whether or not to switch to alternative pricing, but the households I’m normally compared to are larger with more electric appliances, so there really is no comparison. For example, this previous billing period, I used 51kWh while “similar homes” (according to PG&E) used 297kWh.

    So I am concerned that my costs will actually go up with the opt-in peak pricing. Would PG&E make me pay more so someone else can use more energy?

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