Date of Award

2009

Degree Type

Dissertation

Degree Name

Doctor of Philosophy in Environmental and Natural Resources Economics

First Advisor

James Opaluch

Abstract

This research focuses on the relative advantages and disadvantages of using price-based and quantity-based controls for electricity markets. It also presents a detailed analysis of one specific approach to quantity based controls: the SmartAC program implemented in Stockton, California. Finally, the research forecasts electricity demand under various climate scenarios, and estimates potential cost savings that could result from a direct quantity control program over the next 50 years in each scenario.

The traditional approach to dealing with the problem of peak demand for electricity is to invest in a large stock of excess capital that is rarely used, thereby greatly increasing production costs. Because this approach has proved so expensive, there has been a focus on identifying alternative approaches for dealing with peak demand problems.

This research focuses on two approaches: price based approaches, such as real time pricing, and quantity based approaches, whereby the utility directly controls at least some elements of electricity used by consumers. This research suggests that well-designed policies for reducing peak demand might include both price and quantity controls.

In theory, sufficiently high peak prices occurring during periods of peak demand and/ or low supply can cause the quantity of electricity demanded to decline until demand is in balance with system capacity, potentially reducing the total amount of generation capacity needed to meet demand and helping meet electricity demand at the lowest cost. However, consumers need to be well informed about real-time prices for the pricing strategy to work as well as theory suggests. While this might be an appropriate assumption for large industrial and commercial users who have potentially large economic incentives, there is not yet enough research on whether households will fully understand and respond to realtime prices.

Thus, while real-time pricing can be an effective tool for addressing the peak load problems, pricing approaches are not well suited to ensure system reliability. This research shows that direct quantity controls are better suited for avoiding catastrophic failure that results when demand exceeds supply capacity.

Real-time pricing has many advantages, but consumer response to real-time prices is not reliable enough to protect against catastrophic system failure. The reason is the distinction between higher (but well-behaved) increases in marginal supply costs versus system failure. Peak demand problems do not develop smoothly and gradually. Instead, peak demand problems are characterized by infrequent but serious crises whose timing is largely unpredictable. It is the potential for system failure that requires rapid temporary changes, and it is here that pricing measures appear to subject some severe practical limitations. Real-time pricing cannot guarantee a sufficient demand reduction to avoid system failure. The price elasticity for electricity demand is largely unknown, particularly at extreme temperatures. A one-time high hourly pace may not be able to produce the necessary reduction in demand quickly or predictably enough to avoid catastrophe. This suggests one major advantage of direct quantity controls: if the control is effective and can be deployed quickly, regulators can be assured of avoiding system catastrophe. For these reasons, the ideal peak demand policy might contain a mixture of tools, with realtime pricing and direct load controls to reduce peak demand and maintain system reliability under different climate change scenarios.

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