Author Archives: Beia Spiller

How More Transparent Electricity Pricing Can Help Increase Clean Energy

By: Beia Spiller and Kristina Mohlin

The price of most goods we purchase is CostPriceImagegenerally based on the costs associated with the goods' production, including the raw materials used to generate them, the labor associated with their manufacturing, and so on. However, when it comes to pricing residential electricity, many regulators choose to use a flat price per unit of electricity (kilowatt-hours, or kWh) that unfortunately fails to adequately reflect the underlying costs of generating and delivering energy to our homes.

This creates incorrect incentives for conservation and investments in distributed energy resources (like rooftop solar, energy storage, and demand response). Getting these incentives right can go a long way in creating more opportunity for efficiency and clean energy resources.

Pricing electricity generation

The cost of generating electricity from large-scale power plants varies significantly over the course of a day. When demand is low, electricity providers call upon the most efficient and inexpensive power plants to produce electricity. As demand increases, they must also utilize more inefficient and expensive power plants. So, for the price of generation to accurately reflect these costs, it too must vary with the time of day. Time-variant pricing charges customers more for using electricity during periods of high demand (such as during hot afternoons) and less when demand is not as great. This pricing system is an accurate reflection of generation costs.

In contrast, flat rates that don’t vary over time incentivize customers to consume more electricity when it’s most valuable to them, even though consuming during times of high demand places a larger cost on the system. Thus, the current, static pricing system creates incorrect incentives for conservation and electricity use. Read More »

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Transforming the Electric System to Reduce Costs and Pollution

electrical-power-linesBy: Beia Spiller and Kristina Mohlin

Electricity markets around the world are transforming from a model where electricity flows one way (from electricity-generating power plants to the customer) to one where customers actively participate as providers of electric services. But to speed this transformation and maximize its environmental and cost benefits, we need to understand how customer actions affect the three distinct parts of our electric system: generation, transmission, and distribution. Read More »

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When it comes to developing natural gas – not all impacts are created equal

Over the past decade, Pennsylvania has seen a huge increase in natural gas production due to technology advancements. Horizontal drilling combined with hydraulic fracturing, the process of cracking rock open deep underground to release the gas trapped inside, has made Pennsylvania the nation’s second largest natural gas producer. While a thriving natural gas industry is a boon for the state’s economy, well-documented accounts of air and water pollution have been associated with its development.

But do the benefits and risks of natural gas production impact Pennsylvania’s communities equally? In particular, while the broad economic benefits (more jobs, cheaper gas prices, etc…) may accrue to all members in the community, the local environmental impacts may only affect those living in close proximity to a shale gas well.

A recent paper published this month in the American Economic Review examines the impact of increased drilling activity on the property values of homes located in close proximity to a well, and in particular, estimates whether this impact differs for homes dependent on groundwater for drinking compared to those with publicly supplied water. To determine how property values for these different types of homes may be affected, EDF, working with economists from the University of Calgary and Duke University, utilized transaction level data across the state to conduct comparisons in three different dimensions simultaneously:

  • properties very near a well to those further away;
  • properties dependent on groundwater for drinking to those with access to piped water;
  • and properties sold prior to a shale gas well being drilled with those sold after the well was drilled.

Furthermore, to account for the fact that many groundwater-dependent properties may be located further away from urban centers, the data were restricted to homes located near the piped water boundary. This helps eliminate differences in neighborhood characteristics that could affect both the price of the home and its proximity to a shale gas well.

The analysis determined that property values are impacted by proximity to a shale gas well, though results differ depending on the property’s drinking water source. Those with piped water can economically benefit from being very near a well (a value increase of 3 percent for properties within 1.5km of a well), potentially due to royalties and bonuses companies pay to develop on a homeowners land. However, the property values of homes that are dependent on groundwater and located within 1.5km of a shale gas well declined by an average of 13 percent. Importantly, the impact on both types fades with distance; showing that both the benefits (increased royalty payments) and costs (increased groundwater contamination risk) of proximity diminish as one moves further from shale gas development.

This analysis does not draw information from observed air or water contamination. Instead, the data reflects public perception and brings to focus two important observations.

The first is that oil and gas communities are becoming more aware of the environmental risks posed by development. Managing these risks is critically important, as nearly 10 million Americans live within one mile of a hydraulically-fractured oil or gas well.  Smart policies that improve operations and create more opportunities for public transparency are necessary to ensuring communities in close proximity to drilling feel adequately protected from the inherent risks of oil and gas development.

But the study also highlights another key issue – the economic and environmental consequences of oil and gas development (both positive and negative) do not impact communities evenly. There is a clear detriment to some populations – as there often is with any industrial activity.  And rigorous, economic and scientific analyses are important tools for helping policy leaders understand these discrepancies to respond effectively.

Economic research can provide insights into how markets internalize the environmental costs of economic activities, even if these costs do not have a monetary value associated with them (for example, you can’t buy greenhouse gases, but economic research has demonstrated that the social cost of a ton of carbon is around $40). This analysis demonstrates that the threat of drilling activity causing groundwater contamination – which has no market value – still has true costs. Rigorous economic analysis allows us to quantify these costs, leading to more informed policy decisions and better outcomes for both the environment and the local community.

 

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Stakeholders Gather to Discuss How Time-Variant Electricity Pricing Can Work in New York

Originally posted on EDF's Energy Exchange.

new-york-540807_640Last week, Environmental Defense Fund (EDF) co-hosted a successful forum on residential time-variant electricity pricing – which allows customers to pay different prices for electricity depending on when it is used – within the context of New York’s ‘Reforming the Energy Vision’ (REV) proceeding.’

Co-hosted with the New York Department of Public Service and New York University’s Institute for Policy Integrity, the full-day forum, “On the REV Agenda: The Role of Time-Variant Pricing,” brought together more than 150 regulators, utility executives, academics, and other stakeholders to explore how residential time-variant pricing works, what it can accomplish, and how best to implement it. Below is a recap of some of the high-level takeaways from the forum.

How time-variant pricing (TVP) works

One of EDF’s objectives has been to improve the efficiency of the electricity industry by pursuing a market-based approach to electricity pricing. In most well-functioning markets, the cost of making a product and its relative scarcity is reflected in the price. For example, a door is more expensive than the wood with which it is made in order to reflect the labor costs involved. Similarly, strawberries are more expensive during the winter because they are less abundant during that time. Customers understand that prices vary with production costs and over time, yet neither of these elements gets reflected in how residential customers currently pay for electricity.

Read More »

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Smart Meters Need Effective Electricity Pricing to Deliver Their Full Benefits

Co-authored by Kristina Mohlin, Economist

walletSmart meters, which provide detailed electricity use data throughout the day, are a critical piece of a smarter, more resilient 21st century energy system. But they are not a cure-all for modernizing our antiquated power grid.

In Matthew Wald’s recent New York Times article, entitled “Power Savings of Smart Meters Prove Slow to Materialize,” he argues that smart meters have failed to produce measurable savings. And we agree – but not because smart meters themselves have failed. Rather, most customers with smart meters don’t have access to people-powered, or time-variant, electricity pricing, which creates opportunities to save money. This is a missed opportunity for customers, utilities, and the environment.

Time-variant pricing better reflects electricity costs

Throughout most of the country, the price paid for residential electricity is the same regardless of the time of day when it’s consumed. This arrangement is a byproduct of an earlier era, one in which electricity information was difficult to convey and the actions of individual customers was impossible to gauge in real time. In practice, electricity is actually dirtier and more expensive to produce and transmit at certain times of the day, particularly when everybody wants it – for example, at 6pm during a heat wave when customers are cooling their homes. Also, during this high-demand time, energy prices spike and electric utilities flip on expensive and dirty fossil fuel “peaker” power plants to meet energy demand. From an economic point of view, it would be more efficient for electricity used at these peak demand times to have a higher price. Read More »

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    EDF economists discuss how to make markets work for the environment.

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