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Peak electricity pricing can save you money

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[1] 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.


[1] The final version was published as “Effective and Equitable Adoption of Opt-In Residential Dynamic Electricity Pricing,” Review of Industrial Organization, March 2013, Volume 42, Issue 2, pp. 127-160.

Severin Borenstein View All

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.

26 thoughts on “Peak electricity pricing can save you money Leave a comment

  1. Hi, I stumbled on your site when trying to decide whether or not to sign up for the PGE “SmartRate” plan. I am also in Orinda and wonder this: isn’t it likely that the 15 “SmartDays” will be those that are very hot? If yes, although I am happy not to run the usual appliances, (washer, dishwasher, etc.), I will want to use the air conditioner — if I don’t have it on in the afternoon on hot days, my house bakes all night, despite insulation, ceiling fans, etc. Will this just cancel out any savings, as I will be paying a higher rate for all that A/C usage? Any thoughts? Thank you.

  2. Hello! I could have sworn I’ve been to this site before but after going through a few of the posts I realized it’s new to
    me. Regardless, I’m definitely delighted I found it and I’ll be bookmarking it and checking back often!

  3. Thanks for posting this! I just checked, and San Diego (SDG&E) has such a rate. One source claims 1.2M customers signed up, but this is clearly way too high. SDG&E was probably the first major utility in the US with a real-time price, which covered more than 20 very large customers in the 1970s. (I looked at the results for an econometrics paper in grad school.) But nonetheless they are using a conservative implementation for consumers now – the price is $.75/kwh but only for reductions below “baseline.” I will sign up for it.

    • Hi Roger:

      That program sounds like it is paying for demand reduction (from some baseline) rather than charging higher prices on peak days. They are not equivalent, as I pointed out in my paper last year on opt-in dynamic pricing. See section 8 starting on page 35. (A final version of the paper has since been published in a symposium in Review of Industrial Organization in honor of Alfred Kahn.)

      • Severin, Yes, SDG&E is paying only for “reductions from a baseline.” That seems to be all they offer. As you say, it’s a third-best approach. Calculating a baseline raises numerous problems, no matter how you do it. The method mentioned in your paper, of using the previous week’s demand as a baseline, seems especially problematic. In Catherine’s home, she would continue to run her dryer at 5pm most days, rather than redoing the family routine to run at 9pm normally. (Or installing a natural gas dryer.) I don’t know how SDG&E will calculate the baseline, but I will sign up and find out.

        Does the PG&E “high price” vary, or is it determined by a tariff and set a year or more in advance? As long as a utility is sending a text message or email to customers, it would be just as easy to add in a few more bytes of information, specifying the day, the hours, and the price.

        • Roger, PG&E critical peak price is set in advance, though the days are called early afternoon of the previous day. The hours, 2pm-7pm, are fixed.

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