(August 2011) Economic consultant Michael Rosenzweig challenges Constantine Gonatas’s proposal for ensuring FERC’s demand response rulemaking achieves its objectives. Also, Juliet Shavit...
Bringing Customers On Board
Realizing the benefits of smart meters.
so customers must participate in these new programs and technology solutions to realize and share the benefits with the utility. Energy prices traditionally have been described by inelastic demand curves, but now, the customer is in a more influential position to control the energy prices paid.
Information is Power
Although the focus of this discussion so far has been to communicate that significant changes are required on the part of the utility customer, two important points should be noted. First, better customer decision making requires timely, accurate consumption and pricing information. Second, customers need to understand the implications of their actions, both individually and in concert with other similarly motivated end users.
Perhaps the best way to continue this discussion is to provide some context to help understand the elements that affect commodity pricing. Fuel costs, global energy demand, and utility reserve requirements all have an effect on the prices customers pay for their electric, gas, and water services.
• Fuel costs : Even without the external pressure that regulatory and environmental policies exert, commodity prices for fossil fuels are on the rise in the aggregate, despite recent contractions in the price of oil. Rising fuel costs affect customers’ cash outlays not only directly, for fuels like natural gas that are delivered to them and consumed, but also indirectly, through electric rates affected by rising fuel costs related to electricity generation. Fossil-fuel increases combined with general price increases for raw materials required to construct, certify, and bring new generation facilities online are not getting cheaper, and will continue to drive costs higher.
• Energy demand : Global demand for fossil fuels is on the rise. Although the United States and Europe account for a significant percentage of total world demand, many developing countries and burgeoning eastern economies actually are responsible for higher comparative demand rates than are their western counterparts. Countries like China and India certainly understand the impacts of environmental issues, carbon emissions, and general supply and demand relationships, but their prevailing focus is on developing fossil fuel-based power generation infrastructures to support their growing economies and rising standards of living. China and India, for example, simply have prioritized their local improvement initiatives above the concerns of the global constituency. Increased global demand ultimately will lead to rising costs.
• Reserve requirements : Most utility companies are regulated by policies that mandate minimum reserve levels to ensure they can meet power demands during periods of peak demand—even though these peak demand levels are achieved only a few times during the year. Providers servicing regions that are experiencing growth in populations or power consumption typically have two alternatives to meet these requirements. One is to establish spot-market power-purchase contracts that can be engaged quickly to supply the required demand during peak periods. For example, demand rose so dramatically in California earlier this decade that predatory pricing practices were common, and the result was multi-fold increases in electric commodity charges. The second way utilities can meet reserve requirements is to invest in multi-million dollar projects for new or retrofitted generation facilities. Unfortunately,