Common Tragedies

Thoughts on Environmental Economics

Is dynamic pricing green?

Posted by Rich Sweeney on June 10, 2008

Lynne Kiesling thinks so. Writing in Gridwise she states the following,

The connection between a Smart Grid and dynamic pricing can also create environmental benefits. Dynamic pricing can also contribute to improving environmental quality by enabling customers to shift demand away from peak periods with high prices or by reducing their overall use. This economizing incentive is the source of the conservation benefits of market-based pricing. Conservation brought on by dynamic pricing reduces energy costs and increases energy efficiency. This conservation typically takes two forms — curtailing consumption (reducing overall use) and shifting use to non-peak hours. Environmental benefits result from using more efficient generators that operate closer to the conditions for which they were designed, and reduced transmission and distribution losses.

While I agree with just about everything she says here, it’s not obvious to me that the net effect is a reduction in emissions. That’s because coal generators, by far the dirtiest source of electricity, produce the bulk of our baseload electricity (The base simply refers to the level of usage that is more or less constant throughout the day). Coal generators are a pain to turn on and off, but cheap to operate once they’re up and running, making them ideal for this sort of constant demand. When demand surges during the middle of the day, more variable technologies, such as natural gas, come on line to satisfy the peaks.

As Lynne points out, dynamic pricing has the effect of flattening the load curve, as high peak prices encourage people to shift their consumption to other times of day. Even if this pricing scheme does reduce total consumption (which is probably true, but not necessarily the case), it could actually increase the level of baseload generation- ie the total area under the load curve would decrease, but the minimum level would increase. Given current incentives, this would make the grid even more coal heavy than it currently is.

None of this is to say that we shouldn’t invest in smart grid/ dynamic pricing technology. Actually, from an efficiency perspective, this is a no-brainer, and Lynne’s piece lays out all the reasons why. We waste an absurd amount of money, and endure and increasingly tenuous grid, as a result of our opaque, uniform pricing scheme. Nevertheless, absent new source performance standards or a strong carbon price, switching to dynamic pricing could have negative environmental implications, effectively encouraging investment in coal generation.

*******Update********** Mike Giberson, Lynne’s KounterPart,  adds to the discussion by pointing out some additional complexities. All are good points, and worth looking into. On hydro, however, my understanding is that we’re pretty maxed out as is right now. Thus, while some regions like the northwest might have fairly clean baseload generation now, incremental baseload hours would probably require fossil generation. I’m hoping to look at this question more formally using the RFF electricity market model later this summer, and I’ll keep yall posted.

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