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Inclining Toward Efficiency

Is electricity price-elastic enough for rate designs to matter?

Fortnightly Magazine - August 2008

stimulus to DSM programming, accelerating the payback period for customers for upgrading to higher efficiency appliances and dwellings and reducing program costs.

It’s important to note that no evidence shows inclining block rates can produce demand response, which is an intrinsically dynamic concept. In order to achieve the dual goals of energy efficiency and demand response, it would be useful to couple inclining block rates with dynamic pricing. This approach is increasingly interesting to regulators and utilities nationwide. 17

Perhaps the best case study in this regard is the state of California, which, despite having a long tradition of inclining block rates, is moving in the direction of making dynamic pricing a default tariff. 18 Dynamic pricing can’t be accomplished without AMI. Once AMI is in place, an important side benefit would be the ability to provide near real-time information to customers about their accumulated monthly consumption. This feature could be used to alert them as they approach the higher priced tiers. By so doing, the amount of energy efficiency obtainable through inclining block rates would be optimized.

 

Endnotes:

1. Rebecca Smith, “Costs to Build Power Plants Pressure Rates,” The Wall Street Journal , May 27, 2008.

2. Peter Fox-Penner, Mark W. Chupka and Robert L. Earle, “Building to Serve: Long-Run Utility Infrastructure Investments,” Edison Foundation Conference, New York City, New York, April 21, 2008.

3. Paul Davidson, “Price jolt: Electricity bills going up, up and up,” USA Today , June 16, 2008.

4. Ahmad Faruqui, Greg A. Wikler and John H. Chamberlin, “Clouds in the future of DSM,” The Electricity Journal, July 1994.

5. The Brattle Group, “Quantifying the benefits of dynamic pricing,” Edison Electric Institute, January 2008, to be downloaded from eei.org/ami.

6. Ahmad Faruqui, Ryan Hledik, Sam Newell and Johannes Pfeifenberger, “The Value of Five Percent,” The Electricity Journal, October 2007.

7. BC Hydro, “2008 Residential Inclining Block Rate Application,” Vancouver, B.C., February 2008.

8. EPRI, “Price Elasticity of Demand for Electricity: A Primer and Synthesis,” Palo Alto, California, January 2008.

9. Peter C. Reiss and Matthew W. White, “Household Electricity Demand, Revisited,” Review of Economic Studies, 2005, 72, pp. 853-883.

10. In 1982, AB 2443, also known as the Baseline Act, established baseline quantities of energy equal to 50-60 percent of average residential consumption by climate zone and up to 70 percent of average consumption for all electric and gas customers. The Baseline Act required baseline quantities to be priced at 75% to 85% of the system average rate.

11. The resulting rate design is not cost based and is not recommended as an example of an inverted block rate. It has created significant cross-subsidies between customers who use less than 130 percent of baseline use and those who use about that threshold amount. Various efforts are underway to quantify these cross-subsidies at the Demand Response Research Center and the UC Energy Institute. Efforts also are underway to repeal the non-cost based features of the rate design.

12. Joseph A. Herriges and Kathleen K. King, “Residential Demand for Electricity Under Inverted Block Rates: Evidence From a Controlled