Real-Time Pricing Produces Real Savings
Subject Supply
Topic Supply and Demand
Key Words Consumers, money, rates, time-of-day pricing, costs, prices, rates, spot market, savings, real time pricing, capital investment, state regulators
News Story

In some areas, energy consumers are able to save money by timing their usage of appliances such as dishwashers, washing machines, and hot-water heaters to coincide with when low electricity rates. Generally, this means avoiding the 6 a.m. to 10 a.m. and 5 p.m. to 9 p.m. periods. This strategy is possible when utilities engage in time-of-day pricing. It is seen now in more than a dozen utilities in seventeen states.

Consumers can track hourly costs through the Internet or on specialized meters. In the future, it is anticipated that appliances will be computerized so they can switch on and off automatically as energy prices change.

The reductions in electricity usage in peak periods means that the utilities do not have to pay exorbitant rates for additional power on the spot market or finance costly new power plants. For example, California utilities usually pay less than $100 per megawatt-hour, but last July had to pay over $700 on the spot market on some hot days. Savings for utilities translate into lower prices for consumers. Real-time pricing can also help avoid blackouts. It is estimated that if time-of-day pricing were introduced nationally, it would save $10 to $15 billion annually, and remove the need to build 200 power plants.

However, real-time pricing will not spread very quickly. The capital investment in computer networks and special meters would be expensive. Also, state regulators tend to be conservative, fearing that the elderly and poor would be disadvantaged, as they would find it more difficult to shift their energy usage.

(Updated August 1, 2001)

1. a) Where do utilities get their power initially? Where do they get more power if they need it?
b) How does the price typically differ between their primary and secondary sources?
c) The supply curve for electricity represents the willingness of utilities to supply power at each price. What shape does the supply curve have in view of your response to (b)? Explain your answer and illustrate it on a diagram of the supply curve.
2. a) Assuming real-time pricing occurs, on your diagram show the price of electricity in peak periods when the quantity supplied is high. Now mark the price in off-peak periods.
b) If real-time pricing causes consumers to switch their consumption from peak to off-peak periods, what will happen to the prices at each time of day? Illustrate.
c) How will savings arise?
3. a) When a new power plant is built, which determinant of supply changes?
b) How is the supply curve affected? Illustrate in a new diagram.
c) What happens to the price of electricity for a given quantity supplied?
d) How will savings arise if fewer new power plants are needed?
Source Fred Bayles, "Savings seen in hour of energy use," USA Today, July 16, 2001.

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