Decoupling, Stupid

16 06 2010

One way the utility business works like the rest of the economy is that it sells its products/commodities at a price that is higher than the cost of production, on average.  The more utilities sell, the greater their gross profit.  This is at odds with utilities’ incentive to save energy with energy efficiency programs.  As a result, some utility executives are opposed to energy efficiency programs.  That is a short-sighted view but that’s a story for a different day.

As a result of this dichotomy, a pricing mechanism known as decoupling has been developed.  This NREL paper gives a pretty good overview.   It says simply that “Decoupling is a rate adjustment mechanism that breaks the link between the amount of energy a utility sells and the revenue it collects to recover the fixed costs of providing service to customers.”  There are a number of specific ways to do this, some of which are described in the NREL paper, but the bottom line is utilities are less reliant on sales for their well being.

This may seem like an ingenious idea, but I see a lot of significant, if not major hang-ups.  One of the benefits is reported to be price and revenue stability.  But here’s the problem as I see it: revenue stability equals profit volatility.  Take the lousy economy we’ve had the last couple years.  Utility sales are way down but the utility keeps collecting bills that are closer to the long term averages, which means prices increase (if I know math, and I think I do).  They are selling less but there is this decoupled “fixed” cost pasted to customers’ bills.  Good for them.  What about the customers?  They are cutting back on everything due to wage pressures, layoffs, production cutbacks, and lower profits.  So what do they get in return?  A higher energy costs per unit purchased, just what they don’t need.

The opposite is also true.  Say we get a really hot summer.  Now the utility has to sell, and generate or purchase a lot more energy.  In this case, a lot might be 10% more, but that has a huge effect on price.

I just watched a demand response webinar.  Demand response incentivizes customers to cut back during peak periods when energy costs are very high because everything but homeowner’s Honda generators are putting power on the grid.  One way to deliver demand response is to pass the cost of putting the last kilowatt of power on the grid.  I don’t know where the last kW comes from for sure, but it’s way expensive and for good reason.  As full capacity is reached, power generators (companies) either charge the arm of your first born or we get brown outs.  So when the utility passes this cost to the customer the cost is huge, like 5-10 times normal cost.  Peak power is very expensive.

Back to the hot weather.  Now the utility has to sell all this really expensive electricity with less ability to recover (1) the extra high price of electricity and (2) the larger volume of energy delivered.  I suppose if you have real-time pricing described above, this will be mitigated.  But many states including MN and WI have decoupling pricing mechanisms in place, but practically no demand response or real time pricing.  The decoupling in MN and WI is news to me, but if NREL says so, it must be true.

So it seems to me that decoupling presents at least as many and as big of problems as it solves.  Did Washington come up with this?

When I interview with job candidates I usually explain the utility market and why energy efficiency programs are implemented –to keep costs down by delaying or avoiding the construction of power plants, poles and wires.  Again, it seems to me decoupling is at odds with this because the intent is to protect revenue, not prices.  If you protect revenue the “societal” benefits would seem to be lower to me.

In general, not just talking about utilities, decoupling supply and demand is a horrible idea.  Despite all the political bomb throwing regarding healthcare, the number one cause of soaring healthcare costs, which continues to go unaddressed, is the decoupling of premiums and services rendered.  For decades the system worked like this: pay a flat rate and consume all you want.  It doesn’t take a genius to predict what will happen.  In California, they kinda sorta deregulated the electricity market last decade.  They decoupled generation from delivery, deregulated wholesale prices for the utilities but capped consumer prices.  Result: utility bankruptcies and the Governator in a recall election.

I am not saying decoupling is going to result in any sort of disaster like these examples, but messing with Econ 101 supply and demand is almost never a good idea.  If we want to protect revenue, why not just build it into the rate case.  Societal benefits may take the same hit, but at least customers pay for what they consume, “real time”.

If we want to control consumption and keep prices in check, we need all the market effects of supply, demand, and pricing that we can get.  A complete free for all would go too far for a bunch of reasons I’ll save for another day, but we need more pricing response, like demand response described above, not less.

written by Jeffrey L. Ihnen, P.E., LEED AP

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2 responses

5 10 2010
Upside Down Consequence of EE? «

[…] are actually using their CUSTOMERS’ money to sell MORE of their product.  And how about “Decoupling Stupid,” that allows utilities to recover revenue “lost” to energy efficiency?  They spend their […]

31 05 2011
Upside Down Consequence of EE? | Michaels Energy

[…] are actually using their CUSTOMERS’ money to sell MORE of their product.  And how about “Decoupling Stupid,” that allows utilities to recover revenue “lost” to energy efficiency?  They spend their […]

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