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April 8, 2001
by Dennis J. Aigner

In my garage at home I have a footlocker with some old suits and sport coasts stored in it. They all have very wide lapels. They wait, there in the dark, for the day when wide lapels are back in style.

Twenty-five years ago, in the aftermath of the first move by OPEC to curtail the world supply of oil, the federal government explored "demand-side management" as an alternative to building more generating plants that ran on oil or diesel fuel. It tested the idea that appropriate price signals could get electricity customers to shift part of their usage out of peak periods, thereby reducing the need to run smaller, dirtier and more costly generating plants to satisfy peak demand.

In 1978, the Department of Energy helped fund a number of experiments and demonstration projects in California and other states devoted to time-of-use (TOU) pricing and direct load control (e.g., remote cycling of air conditioners). This was just after Pacific Gas and Electric and Southern California Edison had established mandatory TOU-pricing schedules for their largest commercial/industrial customers.

Prices that vary by season and time of day properly reflect generating costs that can vary dramatically between daytime and nighttime, summer and winter, or both. With such prices, users at peak times pay relatively more for power when it costs more to product it.

But it costs more to meter usage by time of day. The potential benefit of shifting usage by vary large power customers out of the peak period clearly justifies the installation of more expensive metering equipment. The questions has always been whether small and medium-size businesses and residential customers could or would shift enough usage out of peak periods to at least offset the additional costs of metering.

A major experiment in TOU-pricing for Southern California Edison's residential customers conducted in 1979-81 sheds considerable light on what is likely to happen were such a scheme to be implemented on a mandatory basis today. The wide lapel can indeed make a comback.

The experiment showed, first of all, that high-consumption households reduced their power use in the peak period in response to higher prices for peak-time power. They shifted some of their usage to the off-peak period but not all of it. They used less electricity overall. In some cases, peak-period energy reductions in the summer ranged up to 19.2 percent. And they showed no tendency to create a new and more significant spike in demand at either the beginning or end of the peak period.

What happens on the worst days in the summer -- the so-called system peak days? Perhaps on those very hot days people would choose to run their air conditioners anyway, no matter how much more expensive the power. If that were the case, while there might be energy savings from TOU-pricing, there would be no reduction in the need for peak generation capacity.

To the contrary, the study found that TOU residential customers not only conserved on the hottest day, but some conserved even more than on average summer weekdays.

Given the differences between peak and off-peak prices that would apply if TOU-pricing were adopted today, Edison residential customers overall would save enough money in electricity charges to pay for the additional metering costs themselves. There is reason to believe the same is true for residential customers in the rest of the state.

Mandatory TOU-pricing at least for large residential customers in California is imperative: Most of the Western states are in the same boat as California. Of the 11 Western states, only Montana added enough electric generating capacity during the 1990s to keep up with population and business growth. Without conservation and prices that reflect the cost of providing electricity, it is going to be a miserable summer.

Equally important for the longer run, flattening the peak allows larger, cleaner, more efficient generating plants to carry more of the load of providing electricity supply. Unfortunately, only a handful of these new plants will be operational soon, if 2003 fits your definition of "soon." Clearly there will be no relief coming from new conventional generation plants being built in California or in neighboring states for the next couple of years.

That's why mandatory TOU-pricing for large residential electricity customers is important. The benefits would be immediate once meters are installed. And the change would rest on a rational that's simple, understandable and compelling: let power prices fairly reflect the costs of generation.

Dennis J. Aigner is Acting Dean of the Bren School of Environmental Science & Management at the University of California, Santa Barbara. He was responsible for the design of a large social experiment -- in time-of-use-pricing for residential customers -- conducted in 1979-81 for Southern California Edison.