One of the insights of The Challenge Dividend is that actions and decisions at all times should be "challenged" by their true cost and effects. Businesses need competitors to challenge their strategies, politicians need voters to challenge their records, and charities need donors to challenge their return on investment. But sometimes we as individuals need to be challenged more in our everyday lives in order to drive improvement for the world. After all, just running your washing machine at night could change the world.
As the United States is facing financial and political costs to its growing hunger for energy, some organizations and inventors are driving toward what could be a revolutionary change in our homes: Charging by the minute for electricity. The plan is for power companies to install upgraded meters in our homes which would follow the minute-by-minute change in kilowatt pricing that energy companies themselves are impacted by. The hope is that once consumers see and start benefiting or suffering from the actual, wildly varying prices throughout the day, we will make better decisions about our power use. The hope is that we turn down air conditioners when we are at work, and run dishwashers and clothes dryers at night when energy is virtually free.
The facts of power price swings are pretty amazing. A study in 2000 showed that wholesale prices in Maryland, Pennsylvania and New Jersey could move from $10/kW to $800/kW in a very short time due to peak use requirements. When a peak hits, temporary and expensive power generation must be put online. And heavy peak use can also lead to black-outs and brown-outs, which in turn jeopardize critical needs and services everywhere they hit. Meanwhile, at night, the minimum power needed to run through the system is basically wasted, thus potentially "free" to those who take advantage.
Initial tests of such variable pricing systems have been impressive. Georgia Power introduced hourly pricing for some industrial customers in 1992. These energy hogs cut peak demand use by 17%, which led to better prices for everyone plugged into the grid. Amoco Fabrics and Fibers alone shaved 10% of its energy costs ($800,000). A test with households in Puget Sound, Washington showed that within only two months customers had moved 5% of their peak energy use to off-peak hours. Another group of 200 people in Washington and Oregon have installed chips in their home appliances that connect the machines to the Internet. Consumers can program them to turn on only when power hits a certain price threshold.
The challenge of variable pricing can lead to reduced energy costs for homeowners, but there is a second improvement for the world overall. McKinsey estimates that variable pricing can:
"Cut [peak energy demand] by at least 30,000 megawatts nationally - enough to avoid (or at least delay) the construction of as many as 250 peak-generating plants, to prevent the burning of 680 billion cubic feet of gas a year, and to eliminate 31,000 tons of nitrogen oxides."
I am excited about the prospect of varying energy pricing both as a homeowner and a global citizen. Variable pricing also fits with the American culture. We are apt to change when we have information, and we believe that one should make his own decisions, versus a government that tells you when to turn off the dishwasher. The only barrier to these benefits is the huge fixed cost of installing next-generation meters in millions of homes. Maybe the billions funnelled to fight a war in Iraq could have gone to this alternative strategy for energy independence, but that's another story.
Note: Thanks to the McKinsey Quarterly for much of the data here.
UPDATE: The New York Times (1/8/07) has a nice piece on another variable energy pricing experiement in Chicago. Of many great data points, the best may be that "Consumers would save nearly $23 billion a year if they shifted just 7 percent of their usage during peak periods to less costly times, research at Carnegie Mellon University indicates."
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