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Pricing the Public Good

Weighing green energy’s costs and benefits.

Fortnightly Magazine - July 2011

miss the forest for the trees, Clemente says, when they enact green energy policies that force consumers to pay more for electricity in the name of efficiency, environmental benefits or renewable energy development. He calls this an “insidious movement” to promote a social agenda that aims to reduce consumption and make green alternatives more competitive by raising the price of electricity. Such a movement, he says, actually hurts the public welfare by saddling the economy with higher costs, and making electricity less affordable and less accessible to the same low-income consumers who have benefited so much from electrification.

That brings us to the third article, by Hannes Pfeifenberger and Adam Schumacher of the Brattle Group. In “ Restructuring Realities ,” Pfeifenberger and Schumacher show that relatively higher electricity prices in many restructured states don’t necessarily translate into less-affordable electricity bills. “[T]he impact of higher rates in fully restructured states is mostly offset by lower consumption, yielding fairly similar monthly residential bills,” they write. The same phenomenon is especially evident in partially-restructured California, “where much lower average electricity use and higher household incomes make electricity bills more affordable on average.”

This assertion is almost a mirror image of Clemente’s argument. Clemente seems to assume that electricity demand is basically inelastic. When prices rise, consumers are forced to shift resources to pay the bill; they can’t stop their electric pumps from bringing clean water into their modern kitchens, so they’ll curtail contributions to their daughters’ college funds. Meanwhile, jobs are lost when commercial and industrial customers leave the area in search of cheaper energy supplies. As I read it, this is the basis of Clemente’s argument against policies that result in higher electricity prices.

Pfeifenberger and Schumacher, however, assert that demand today is actually quite elastic—and that higher prices don’t necessarily result in either demand destruction or personal deprivation. Instead price hikes can encourage conservation, or at least load shifting, as customers take advantage of programs to control their electricity bills. Although Pfeifenberger and Schumacher include many factors in their analysis, they acknowledge “the basic effect of demand elasticity, which reduces consumption in response to higher prices.”

So who’s right?

Supporting Change

The fact is, in all three of these articles, the authors leave ample room for debate. We might reasonably argue that advancing renewable energy, especially solar, is a fundamentally good thing that merits public support, in anticipation of public benefits. We might also expect lawmakers to weigh such future benefits carefully against the present-day cost of subsidizing immature technologies. We might insist, justifiably, that our energy policies first ensure that electricity service is at least as accessible and affordable as it is today, before we start sending price signals to encourage any particular alternatives.

We might also recognize that time-of-use metering and other demand-side technologies are altering the way electricity is sold, and catalyzing much greater demand elasticity than would’ve been possible when utilities were first bringing power to the masses.

And even though we might abhor the notion of intentionally raising prices to drive a social agenda, we might also understand