The Power of Price: Energy and Demand Response

We cannot directly store large quantities of electricity (yet), so grid operators work to keep the supply and demand of electricity in constant equilibrium in real time. As any economist will tell you, changes in supply and demand lead to changes in price. This makes the real price of electricity is as volatile as shares on the stock markets.

But what about the price you and I pay for electricity? For most people in the United States, the average residential electricity price holds steady at about 10 cents a kilowatt hour. And that’s a problem. Pricing is one of the core functions of marketing. With an artificially steady price, we’re missing out on information and opportunity.

To keep that steady price, utilities build and maintain power generators that they operate just a few hours a year to meet peak demand for energy. These “peaker plants” can cost up to $100 million to construct, only to sit idle or on standby 99 percent of the time.

A steady price can’t tell us consumers when the supply of energy is low and encourage us to cut back, like on hot summer afternoons when homes and businesses switch on the air conditioning. Because consumers don’t have a price to signal low supply, utilities fire up their peaker plants for those hottest 100 hours of the year, creating expensive energy and its accompanying pollution.

And because utilities have to fold the expense and uncertainty of peak energy into a steady price for us consumers, they pad the price we pay. The real volatility and the artificially steady prices average out over time, but often the price we normally pay doesn’t reflect the true cost of energy at the time of purchase.

There is a better way to handle the volatility of electricity supply and demand: use pricing to tell consumers the state of the energy supply. In the energy world this is called demand response.

Thanks to device automation and communications networks, appliances can be equipped to receive the signal of an increase in electricity price, and react according to a pre-programmed script.

For instance, your air conditioner could be set to switch off for a few minutes every hour when the price for electricity rose to a certain threshold. You probably wouldn’t notice the difference inside your house. But, that one little reduction across an entire utility’s service area on a hot afternoon could be what keeps the peaker plants offline.

Although changes can be small, the savings can be big. Combining dynamic pricing with enabling technologies can reduce peak demand for energy by up to 35 percent.

Would you be willing to put the power of pricing to work for you by enrolling in your utility’s demand response program? Many utilities will give you an incentive to participate in a demand response program, which can save you money in addition to keeping you from using expensive peak energy.

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