I’m going to geek out for a second. But first, check out this graph:

utilities western

I suppose there are two lessons:

1. Price and consumption are not perfectly correlated. Clearly there are many non-price factors affecting electricity consumption. (These include, at least, the local climate, building size and type, and local energy efficiency policies.) But still…

2. Price definitely affects use, and the fit gets better as you move up the price axis. The more expensive electricity is, the less likely consumers are to be profligate.

In energy circles it’s sometimes alleged that consumers are price insensitive or economically irrational about consumption. There’s some truth to that, but it’s only a partial truth.

These charts help demonstrate why carbon pricing can be effective. Putting a price on carbon—or a price on energy — acts to reduce consumption. Price is not the only factor and it may not even be the biggest factor, but it does appear to matter. And it appears to matter more above about 10 or 12 cents per kilowatt hour.

This hooks into a larger debate in the Western Climate Initiative.

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  • Many utilities are arguing that they should get free carbon allowances on the grounds that they are rate-regulated, and so they will not (or cannot) take windfall profits. They even deploy arguments about consumer protection, pointing out that they can protect ratepayers by not passing on price increases. That sounds pretty good at first, but it doesn’t work so well in practice. (For the definitive rebuttal to these arguments, see Clark’s excellent post.)

    The point is, for carbon policy to work fairly, the price of energy needs to go up to stimulate appropriate conservation. When the price of electricity is low, as it is in Seattle for example, even the most aggressive efficiency and conservation programs yield modest results. (And Seattle truly does have industry-leading programs.) Residents of California’s air-conditioned cities consume less electricity, on average, than residents of either Seattle or Portland.

    Luckily, under smart versions of cap and trade, higher energy prices can be good for consumers—as counter-intuitive as that sounds. Here’s how: WCI should auction carbon permits and allow utilities to pass on the prices to consumers. Then—and this is critical—WCI should refund the money to citizens, especially those below median income. These refunds (two flavors here and here) can easily make most energy consumers whole again. With cap and rebate, the “price signal” of carbon gets communicated through to consumers, but with no net pain for most.

    (A footnote: there might still be inequities in a system like the one I’ve described. If you’re a Seattle City Light customer, for example, your hydro-based utility needs to purchase very few carbon permits and so there would be only a very modest price increase at most. That would mean a continuation of the limited price incentive to conserve. But your neighbors in western Washington would see higher rate increases, and your friends in, say, southern California would see much higher increases. We might need to iron out these geographic inequities.)

    Want more evidence of the relationship? Okay, then. Here’s a chart for the 200 largest utilities in the United States. You see very much the same price-consumption trend as you see in the West. And the correlation appears to get stronger as prices get higher.

    utilities - us

    The data for these charts come from energy economics guru Jim Lazar. Jim also provided original versions of these charts and then I re-designed them to make them a little easier to read. The conclusions in this blog post are, of course, mine and not necessarily Jim’s.