by Tanya Bodell, CRA International Inc.
In 1954, Atomic Energy Commission Chairman Lewis Strauss issued his infamous words predicting that electrical energy would become “too cheap to meter.” The generation of children he referenced—now known as baby boomers—are approaching retirement.
Yet last year’s record-high energy prices, impending carbon legislation and capital costs to implement new technologies imply anything but cheap power. That said, other economic forces support the spirit of his prediction.
Delivered power is not likely to be too cheap any time soon. Although recent supply and demand conditions have depressed wholesale power prices, customers can expect their power bills to increase for the following reasons:
- Environmental Policy. Incorporating the negative externalities of power production into prices though environmental policy increases costs to produce power and, therefore, generates higher marginal costs.
- Transmission Investment. Significant investment is required to update U.S. transmission networks and connect renewable resources located away from existing load centers. Such investment must be recovered from consumers.
- Smart Grid Technology. The biggest investment to date in smart grid technology is in advanced metering infrastructure. Even with 50 percent government funding, however, smart grid investment requires capital investment that increases costs to deliver power to consumers.
Offsetting these factors are:
- Demand Response. If consumers receive a transparent price signal and have the means of modifying their behavior in response to that price signal, end users are likely to change their load patterns.
But did Strauss really mean delivered power would be too cheap to meter? Or was he differentiating between low marginal costs of producing electrical energy vs. the high capital costs of building capacity? A rational price signal that reflects low marginal costs from nuclear power would be very cheap, and cost recovery could be better managed through a fixed price vs. a price per kilowatt hour. If he were focused on cost recovery, Strauss’s prediction might not be far off; technological changes are challenging traditional usage-based tariffs today.
- Low-marginal Cost Resources. Carbon policy encourages low-emission generation such as renewable resources that have high upfront capital costs and negligible marginal costs of production better hedged with fixed-capacity charges vs. usage-based rates. To this end, government tax incentives cover roughly one-third to half of the all-in cost of new wind generation.
- Behind-the-Meter Generation. In contrast to a world of large-scale, centralized generation, economics and government incentives support investment in distributed generation located behind customers’ meters. This new paradigm challenges the fundamentals of utility cost recovery, and some utilities are refusing to purchase excess power from consumers, blocking installation of two-way meters and proposing fixed-capacity charges that reflect customers’ peak or potential peak load vs. actual usage.
- Peak Shaving. Distributed generation, load shifting in response to price signals from a smart meter and penetration of plug-in hybrid electric vehicles (PHEVs) could minimize price differentials between peak and off-peak hours. Lack of volatility could require ongoing development of capacity payments to encourage new entry—payments that flow directly to customers as a capacity charge.
- Decoupling. Ongoing declines in load created by the recession, energy efficiency and demand rationalization are pressuring utilities to pursue a decoupled tariff structure that breaks the link between cost recovery and usage.
- Advanced Meters and Information Technology. Microprocessors and wireless communications allow for recording and reporting electricity usage information from plugged-in users behind meters such as smart appliances and PHEVs. Smart grid technology could provide access to peak demand while simultaneously making kilowatt hour meters redundant, creating new opportunities for innovative tariff structures.
Current technology changes and public policy objectives challenge usage-based tariffs. Although price signals are needed to motivate load response, they should reflect the underlying economics of services being delivered if markets are to rationalize scarce resources. In many cases, fixed charges might better reflect the economics of new generation technologies. Decoupling cost recovery from usage might be required to prevent stranded costs.
This is not to say the reign of usage-based meters is over. Smart meters that enable real-time pricing and peak-use pricing could prove invaluable in accessing the benefits of consumer response and load shifting. New tariffs will be designed around this new information. Technology has revealed a new vista for us today, just as it did for Lewis Strauss 55 years ago. We, too, should rethink how power should be priced.
Author
Tanya Bodell is vice president of CRA International Inc. E-mail her at Tanya.bodell@fticonsulting.com
“It is not too much to expect that our children will enjoy in their homes electrical energy too cheap to meter.”
Lewis Strauss, 1954