Pricing Power
Subject Shortages
Topic Equilibrium
Key Words Energy Crisis, Real-Time Pricing, Prices, Consumption, Demand, Shortages, Electricity Bills
News Story

The solution to the current energy crisis in California may be real-time pricing, whereby big consumers track prices and vary their consumption accordingly. The idea is that big organizations would decrease their use of electricity when the price is high - which is when electricity is most in demand and shortages are most likely; and increase their usage when the price is low - which is when the system is least pressured.

For example, Fieldale Farms, a large poultry producer in Georgia, shuts down its chicken-feed mixers at the first sign of a price spike, often at the end of a work day, which allows 50 megawatts of power to go 14,000 Georgia homes for air conditioning and other purposes. They then turn the mixers back on when the price falls, usually after 11 p.m. The company saves 20 percent on its electricity bills, and consumers are more likely to have interrupted power. In total, 1,650 businesses, accounting for one-third of Georgia Power's peak load, use real-time pricing, regularly cutting 5 percent off the peak load. This can make all the difference in shortage situations.

For this to work in California, producers would need pricing information over the Internet, real-time pricing meters, and billing software. The shortfall is expected to be 1,000 to 2,000 megawatts next summer, and it is estimated that real-time pricing could result in savings of 3,000 megawatts at peak times. For the time being, however, the state is focusing on increasing the generation of power.

(Updated April 1, 2001)

1. Draw a supply and demand diagram of the market for electricity in California. Mark the equilibrium price and quantity.
a) Show what happens in peak demand periods and the price does not change. Mark the imbalance between demand and supply. Is there a surplus or a shortage?
b) How would real-time pricing change the quantity of electricity demanded and supplied?
2. a) Now show what happens in low demand periods when the price does not change. Is there a shortage or a surplus? Label the imbalance on your diagram.
b) Explain how real-time pricing could change the quantity demanded and supplied and help overcome the imbalance.
3. a) In California, the state is attempting to secure increases in electricity supply. Draw another diagram illustrating how they hope that this will resolve the crisis and remove the need for rolling blackouts.
b) What the advantages and disadvantages of this approach compared to real-time pricing?
Source Bryan Acohido, "When energy prices go up, some businesses turn off," USA Today, February 8, 2001.

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