I was messing around with some spreadsheets, and out popped this little guy:
The chart plots the 50 states — minus Hawaii but plus DC — with the price of electricity on the horizontal axis and consumption on the vertical axis. (I left off Hawaii because it’s a serious outlier, with average electricity prices nearly twice as high as any other state.) A simple regression shows that price “explains” about 42 percent of consumption.
My conclusion? Price seems to be a factor in residential electricity consumption. In fact, the same kind of relationship appeared when I ran a couple of regressions using utilities instead of states.
But I don’t want to venture too much further, because things get murky. In statisics, “explains” doesn’t mean “causes”—and I haven’t controlled for income or for local climatic conditions, either of which could have a big influence on response to prices. Plus, 50 data points is a pretty small number for trying to tease out a statistical relationship with a regression; and data that’s aggregated up to the state level may mask important differences that would be apparent in a more granular picture.
Yet even with all those caveats, it hardly seems crazy to think that price affects demand—and that high prices dampen demand. I mean, the relationship is true in some sense for pretty much every consumer good I think of, even including purportedly inelastic goods like gasoline.
All of which may mean that the Northwest’s extremely low electricity prices may be working at odds with conservation. (Idaho has the cheapest residential electricity in the nation; Washington is fourth cheapest; Oregon is 11th; Montana is 16th.) The Northwest has a laudable history of efficiency and conservation programs, and there are still many more market failures to fix. Yet if policymakers are serious about taking the next steps toward a cleaning up the region’s energy portfolio, they should probably take a hard look at raising prices.
All figures in this post refer to 2008 and are calculated from the US Energy Information Administration data found in Table 5A, here.
Interesting graph, Eric. And all caveats accepted. I have a little disagreement with your statement, “Yet if policymakers are serious about taking the next steps toward a cleaning up the region’s energy portfolio, they should probably take a hard look at raising prices.”I work with firms to develop ISO-conforming Energy Management Systems for their operations. And, sure enough, the low cost of electricity around here often discourages the more ambitious aspects of a plan. It just doesn’t ‘pencil out.’ And getting more projects to ‘pencil out’ is what you are talking about here.But the price of electricity is a tangled ball. The BPA is pretty much circumscribed in what it can charge utilities over its costs. The utilities provide incentives based upon avoiding having to build more generation capacity. There are surcharges to fund conservation programs. There are ‘green power’ fees. And, finally, high prices to discourage consumption in the PNW makes more power available for export at a lower price to CA, where the lower price will encourage consumption. So the answer isn’t so clear.I think that the better approach is to require a more honest and broadly based assessment of what the electricity costs (which is different from what it can be sold for). Here in the NW, salmon are obviously part of the equation. Emissions apply everywhere, and are so far fantastically undervalued considering the impact they are having. But what else? Just “raising prices” to reduce demand is a bit of a blunt tool. There needs to be a cost that drives the price so that there is an outlet for creative response.
Eric de Place
Paul,First off, and just for the record, your comment is a great example of why I love writing for Sightline! Anyway, I concede that it’s a “tangled ball,” as you put it. And you raise a number of intriguing specific complications that make it true that simply raising prices is too blunt a tool. Still, raising prices would increase the ROI on efficiency investments, which would in turn reduce consumption. And raising prices, if done correctly, could help internalize the externalities of climate emissions, salmon, etc. But I agree that we’ll need some delicate instruments to do it right.
1. If you want to imply that price affects demand, you should switch the X and Y axes.2. To partially answer Paul’s comment about low prices reducing incentives to conserve, and about the tangled ball in general, one thing I think utilities have not implemented enough is tiered rates. I don’t know enough about the rules that govern rates in PNW utilities, but I know that EWEB in Eugene has tiered rates (i.e. the first 800 kWh per month cost 5c/kWh, the next 800 cost 7c/kWh, etc.). I wonder if the tiered rates could be made steeper, so that low usage could be pretty cheap, but the marginal rates near the high end would be high enough to encourage big consumers to get more efficient.
Speaking from personal experience, the EWEB tiered-rates in Eugene do provide good incentive (i.e., “feedback”) for saving energy (i.e., “money”)—especially when you’re on a low-income budget. Also agree that those big consumers do need steeper rates to encourage them to be more efficient!
Tiered rates are valuable, but here’s the conundrum I see: Energy conservation serves only to keep electricity prices where they are. Indeed, to the extent we can get California consumers to purchase our excess electricity (excess created by conservation programs) on the open market, our electric rates get subsidized and are arguably unjustifiably low.My thinking is that we need to take the electricity conserved and translate that into other resources. For example, we save XXX mwh regionwide over a month. We convert that to how much “water-through-the-dams” was saved, and spill that water in a way that benefits salmon instead. That way it’s a sort of cap-and-trade for electricity. We are actually generating less electricity and investing more in our other resources over time. The cost of electricity rises, especially outside the region, because the excess created by conservation is actually removed from the market.I know there are probably a thousand things to work through to put such a system in place. But the fundamental dynamic is what will start the positive feedback cycle. So long as our ‘conserved’ electricity is simply made available for others to use, the price will not go up, and serious energy efficiency will be hard to justify.
I agree with Jonesey. The standard procedure for data presentation is for the Y axis to be the dependent variable. The way the data is presented looks like it is conservation that is influencing price.
Eric de Place
I updated the post with a new chart that switches the X and Y axes. Sorry about that guys.
Wish I had adequate time to respond to this but bottom line – WHOA!- There are many barriers to unilaterally raising electricity prices because they are “too low.” One, utilities are regulated and limited to charging based on actual cost of service with, for investor owned utilities, a rate of return allowed. And the cost of salmon recovery – and other environmental externalities – is included in the cost of BPA power and those utilities that invest in salmon recovery in their own facilities, e.g. City Light. – To promote higher rates to capture more energy efficiency flies in the face of nearly three decades of improving energy savings in the Pacific Northwest: energy efficiency is the cheapest, cleanest energy resource and has saved the region billions of dollars – dollars that get spent elsewhere in the economy. As the just adopted 6th Power Plan shows, we can meet at least 85% of the region’s electricity needs for the next 20 years with EE (the rest with already required renewable resources) and rates will go up just a tad – but electricity bills will go down. The Plan shows how the region will accomplish those levels of EE and I can assure you that arbitrarily charging more for electricity is not one of the strategies.- We are fortunate in the NW to have relatively low electricity costs and yes, from the consumer’s perspective, the low rates can be a barrier to investing in EE – i.e., long paybacks. Which is why electric utilities help shorten the payback with financial incentives for cost effective EE measures. – But among all the barriers to achieving more EE in the NW, long paybacks aren’t even at the top of the list. Split incentives (the landlord owns the building, the renter pays the energy bill is just one among many examples), the hassle factor (OMG – the water heater just broke, quick replace it, no time to research which one is more efficient!) and other elements of human nature and market failures are even bigger barriers. (Economists ask if people really will just leave a $20 bill lying on the table and the answer is – yes.) I recommend to all the NW Energy Coalition’s paper on this subject “Solving the Energy Efficiency Puzzle” http://www.efficiencyworks.org- Washington’s average electricity rate is, as you note, among the lowest in the country. Yet, our history of investing in energy efficiency is among the highest in the country – but, because we have so much electric heat, the level of EE on a per capita basis doesn’t show up. It can be measured, though a different way: the region has the highest penetration rate of CFLS, high efficiency clothes washers, showerheads, etc. Oregon and Washington have some of the best energy codes in the country and we’re ahead of the curve in adopting other efficiency standards. Seattle City Light offers the longest running energy conservation program in the country. Like I said – etc, etc. – Isn’t Sightline the organization that loves to hate regressive taxes? Well, think what an arbitrary rise in electricity costs would do to lower and middle income homes – or small businesses for that matter. Those with the least ability to pay will be affected disproportionately – those with plenty of money will continue to add more big TVs, home theaters, hot tubs, huge houses, etc. and are hardly likely to take any EE actions they wouldn’t already do with existing electric rates. Or – in the case of a business or landlord, they’ll just pass the extra cost along to their customer.
Thanks for the post.There are real costs of power that the market doesn’t price in. I agree with commenters that a blanket price increase is the wrong way to go- but there are very sensible economic instruments that would raise the price in a way reflective of costs.1 – carbon pricing would address the greatest externality in power consumption costs, just as SOx cap-and-trade did before it. A simple, directed cap-and-trade bill that exclusively applied to electricity production would probably be more effective at meeting any number of policy goals than an economy-wide effort riddled with compromises and uncertainty. Of our national energy consumption, roughly 40% is grid power, 30% is vehicle transportation, and the rest is a mixture of gas heating, petrochemical feedstocks and various industrial uses.2 – Even without a price on carbon, tiered pricing goes a long way toward influencing conservation without introducing a ‘regressive tax’. It would, however, muck with any cost incentives to use grid-powered electric cars. Here in southern california (Southern California Edison is my utility), My electric bills are less than $30 a month in a state famous for high energy prices, because I stay in the first tier. On the other hand, the marginal cost of buying enough electricity to power e.g. a Chevy Volt 20 days a month is pretty much on par with gasoline.But that’s because gasoline should be more expensive, too. It’s just far easier to implement tiered pricing on electricity, where you already have a meter for cumulative use. We “should” be moving to grid-powered transportation anyway. By the time we get there, it would be nice if there were an intelligent pricing system for grid power.And to Saratoga: passing the costs onto the consumer is the point. Less costly technologies should be .. well, cheaper. your efficiencyworks website has an article about behavior change above the fold– it isn’t going to happen magically.
Eric de Place
Saratoga,Great points. As you probably know, Sightline has written fairly extensively about most of the things you mention. The NW indeed has an admirable history of conservation—and yet I think everyone would agree that there is still much, much more that can be done. I don’t say that price is the only factor, or the main factor; just that it probably is one factor in the equation. As for regressivity, it’s always a big concern with energy prices. Fortunately, there are some good models—like Cap & Dividend—that allow us think about raising prices on carbon and at the same time, by returning the proceeds to consumers on a per capita basis, actually improve income equity in the process. I could imagine something similar happening in the NW electricity sector. But that’s a topic that’s well beyond the scope of this post!
In a recent post above I wrote that in order to maximize the effectiveness of our electricity conservation efforts, we needed to make sure that the electricity we saved did not just end up on the open market where it would actually lower prices for others and ENCOURAGE them to use it. I advocated that we invest the actual resources saved in not producing the electricity to restore other resources that we may have depleted. Here’s one example on how to do it in our specific region.http://www.justmeans.com/What-Do-With-an-Extra-Kilowatt/11005.html