Time-Varying Electricity Pricing
The Environmental Defense Fund’s senior manager for Grid Modernization posted a blog entry this week about the importance of time-varying electricity pricing to reduce usage at peak hours of the day – such as hot summer days when consumers come home from work and turn on their air conditioners. Across the US, consumers used between 47 and 84 percent more power during peak hours than average hours, according to data from DOE’s Energy Information Administration. This has major implications for energy costs. Why?
Price and Environmental Impacts of Peak Power
During off-peak hours, electricity demand is met primarily through generation from more efficient plants, which are cheaper to operate since they use less fuel. As demand increases, a greater portion of demand must be met through less efficient, often older, power plants. This means that for every unit of energy produced, these plants have higher emissions and are more expensive to operate, and therefore they charge higher prices to cover their fuel costs. But in competitive electricity markets, all sources of generation receive the same “marginal clearing price” for their electricity. That means operating these inefficient plants drives up the price of all generation, including the more efficient plants. For more information, see Retail Energy Buyer’s explanation of how wholesale energy markets function.