NCPA - National Center for Policy Analysis

Time-Of-Day Electricity Pricing

June 8, 2001

Energy experts say that electricity-supply problems aren't due to a long-term lack of generating capacity.

According to Henwood Energy Services Inc., of Sacramento, Calif., close to 100,000 megawatts of generating capacity are under construction and another 300,000 are in planning stages. Some plants won't be built. But if all of them were to be constructed -- and on schedule -- it would increase U.S. generating capacity 50 percent by 2004. That would be much more than is needed.

Experts say the real problems lie in consumption and transmission considerations.

Consumption could be rationalized by time-of-day pricing, they say.

  • Most consumers don't know it, but the overnight price for electricity at wholesale can be practically zero.
  • Utilities and other power producers are sometimes actually forced to pay industrial consumers to use electricity in the early-morning hours -- because it's too expensive to shut down power plants at night.
  • With time-of-day pricing, consumers would be encouraged to alter their habits -- running the dishwasher at night, for example -- and pounce on such bargains, while evening out demand.

Also, prices for the transmission of electricity over long distances do not rise and fall based on demand. When everyone wants to use the same power lines to get electricity from some low-cost generating plant, congestion results.

Higher prices for congestion are encouraging entrepreneurs to build plants close to cities so as to take advantage of those higher prices. And experts say that is helping.

As always, the price mechanism -- when it is allowed to work -- evens out supply and demand.

Source: Peter Coy, "Electricity: Reforms that Save Money," Business Week, June 11, 2001.


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