Another electricity company is trying the old “carrot and stick” approach to the pricing of electricity rate plans. An Oklahoma electricity provider, OGE, has introduced the OGE SmartHours electricity plan with hopes of changing consumer habits and shifting electricity usage away from peak demand time frames. The “carrot” in the plan is the 4.5¢ per kwh rate that is effective 19 hours per day during the weekdays and all day during weekends and national holidays. That works out to just over 97% of the time that the low base rate is in effect.
The “stick” is the variable rate charged during peak hours. Peak hours in the plan are defined as weekdays from 2 p.m. to 7 p.m. The rate during these periods can spike to more than 10 times the base rate, going all the way up to 46¢ per kwh, depending on the demand on the electricity grid.
The OGE plan is one of many new smart meter enabled electricity pricing plans being offered by electricity companies across the country. The pricing plans are meant to address a very real problem with all modern electricity grids. Grid capacity must be enough to meet demand during peak usage periods, such as 2 to 7 p.m. in Oklahoma. The vast majority of the time this means that excess grid capacity sits idle. This is a very inefficient way of managing electricity needs, but until recently has been an unavoidable reality.
Time of day” pricing plans, also called Variable Peak Pricing, represent the future of consumer electricity pricing. Smart meters enable electricity companies and consumers to see electricity usage by time of day in fifteen minute increments, allowing for better real-time pricing of electricity all the way down to the retail level. Demand-based pricing can help alleviate the peak demand problem for electricity grids.
TXU Energy, a Texas-based electricity provider, recently introduced a time of day pricing plan called TXU Free Nights. The OGE and TXU plans have some significant differences, however. As the name would imply, the TXU plan offers free nighttime electricity. The plan defines night as 10 p.m. to 6 p.m. The OGE plan asks consumers to shift electricity intensive activities earlier or later by just a few hours to avoid a five hour window. The TXU plan, by contrast, asks consumers to avoid a 16 hour chunk of the day and defer activities to a time when most people are sleeping (10 p.m. to 6 p.m.).
Both plans will likely suffer from a phenomenon known as adverse selection. Adverse selection is a term common in the insurance industry. Roughly stated, it means that an insurance policy is more likely to be sought out by people who may be at higher risk of getting sick or who may know they are already sick. The TXU plan, for example, would be particularly attractive to night owls who already use a large portion of their electricity at night or people who plug in their electric cars at night. In these cases, the plan doesn’t change the electricity usage pattern of the consumer at all, but rather just gives them a better pricing for what they already do. That’s certainly a good outcome for the individual consumer, but it doesn’t much change the overall demand profile on the grid.
The TXU plan has another major drawback for the electricity grid as a whole: it invites waste. As is human nature, we tend to not value something that is free. Since you are not being charged for electricity during the overnight hours, why turn off any lights before you go to bed? Heck, turn the thermostat down to 60° overnight! Why not — it’s free!