Here in California, summer weather is quickly approaching and once again parts of the state are facing potential electricity shortages. This year the biggest concern is in Southern California due primarily to the continued outage at the San Onofre Nuclear Generation Station (SONGS). If there are shortages, they are likely to occur on the hottest days of the year when air-conditioning demand is at its peak. Research by many economists (including Wolak, Ida/Ito/Tanaka, Jessoe/Rapson, and many others) has shown that a very effective way to cut peak demand is through “critical peak pricing” programs.
These programs go by different names at different utilities, including SmartRate, SmartCents, Peak Day Pricing, and Summer Advantage Incentive. They give you a discount on power most hours of most days, but charge a substantial premium for power on the highest demand days of the summer. Many utilities now have such programs, though they are not always well advertised or promoted. In nearly all cases for residential customers, they are opt-in, so you have to search them out and figure out how to sign up. I wrote a paper last year that reviewed effective and equitable approaches to implementing opt-in critical peak pricing and estimated the potential impacts on different types of residential customers in the service territories of PG&E and Southern California Edison.
If you are a PG&E customer in the Bay Area (or other milder climate where you don’t have A/C or don’t use it much), their SmartRate will almost surely save you money. At my house in Orinda (east of Berkeley and somewhat warmer in the summer), we signed up for it last year. We saved about $40 on electricity, about 13% over the 6 months of the program (May through October). We did avoid running laundry or the dishwasher between 2 PM and 7 PM during the 15 critical peak days that were called, but our adjustments were fairly minor. If you live in the Bay Area and have not signed up, I urge you to at http://www.pge.com/smartrate. You can’t really lose during the first year, because the PG&E program has “bill protection,” which guarantees that your electricity bill in your first year on the program will be no higher than it would have been under the standard rate.
PG&E’s program isn’t perfect:
— I’d like to see them do “shadow billing”, showing on every bill (regardless of which tariff the customer is on) how much the customer paid under the tariff they are on and how much they would have paid if they had switched to an alternative tariff.
— I would also like to see PG&E get more flexibility from the regulator (the California Public Utilities Commission) on how many critical peak days they can call each year. A fixed (or maximum) number of calls each summer creates perverse incentives for the utility to call critical peaks on days that are not that hot, or to hold back on hot days in case they run into even hotter days later in the summer.
I discuss these and other issues at greater length in my paper on opt-in critical peak pricing.
Saving money is fine, but the real reason I want you to sign up is to get more direct experiences with critical peak pricing that can shape the way utilities and policymakers design such programs.
If you have already signed up for PG&E’s (or any other utility’s) critical peak pricing program, I welcome your comments about the program. And if you haven’t signed up yet, particularly if you live in the Bay Area, it is time to start saving money and helping to reduce the stress on the grid during peak times.
Severin Borenstein is E.T. Grether Professor of Business Administration and Public Policy at the Haas School of Business. He has published extensively on the oil and gasoline industries, electricity markets and pricing greenhouse gases. His current research projects include the economics of renewable energy, economic policies for reducing greenhouse gases, and alternative models of retail electricity pricing. In 2012-13, he served on the Emissions Market Assessment Committee that advised the California Air Resources Board on the operation of California’s Cap and Trade market for greenhouse gases. Currently, he chairs the California Energy Commission's Petroleum Market Advisory Committee and is a member of the Bay Area Air Quality Management District's Advisory Council.