NCPA - National Center for Policy Analysis

Preventing Blackouts with Dynamic Retail Pricing

August 20, 2003

To prevent future blackouts, we need to systematically rethink the power demand and supply system -- not just transmissions lines -- says Nobel Laureate Vernon L. Smith.

Incentives for transmission investment without retail demand response risks expensive and unnecessary investment decisions, says Smith. Today, due to rigid pricing regulations, neither consumers nor utilities can rationally respond to changes in supply costs:

  • Retail customers pay averaged rates, making their demand unresponsive to changes in supply cost.
  • But the cost of getting energy from its source -- over transmission lines, through the substations and to the outlet plugs -- varies hourly, daily and seasonally.
  • Without dynamic retail pricing, no one can determine whether, when, where or how to invest in energy infrastructure.
  • A signal controlled switch on air conditioners and other appliances, coupled with a contract that pays the customer for the right to cut off the appliance for specified limited periods during peak consumption times of the day.
  • A second watt-hour meter that measures nighttime consumption, coupled with a day rate and a cheaper night rate.
  • A time-of-use meter that measures consumption in intervals over all hours of the day, allowing the price to be varied with delivery cost throughout the day.
  • A home load management system unit can turn appliances on or off depending on price, according to consumer preferences.

With free entry, exit and pricing, competition will force prices to be slashed off-peak and increased on-peak to better utilize capacity. As in other industries, investors will risk their own capital -- not your tax dollars or a charge on your utility bill.

Source: Vernon L. Smith (George Mason University professor and NCPA senior fellow) and Lynne Kiesling (Reason Foundation), "Demand, Not Supply," Wall street Journal, August 20, 2003.

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