Friday, November 15, 2013

Simple Economics

This is just some "mental doodles" on how electricity could be priced in the retail market, if we were starting with a blank slate.  Some of these musings might not be practical in terms of a transition from what is, but it may be a useful exercise in goals.

I'm no economist, so I would appreciate comment and discussion from those who are trained in the field.  I will be updating this "scratchpad" as time goes on:



We tend to think in terms of fixed and variable costs, and in Electricity, we generally operate as though the T&D costs are pretty much fixed, and the generation costs are variable (time of day, demand, supply, fuel costs, etc.)

On a long enough view, all costs are variable, but the question is; "What do they vary with?"  Or in other words, what is the primary cause of the variation?  Could we reasonably price electricity based on this view?

Distribution service (not the energy, but the ability to deliver it) varies primarily with two things; peak load and distance.  The greater your peak load, the more robust the feeder lines, transformers and substations that serve you need to be.  The further you are from a substation, the more hardware has to be strung, and the more miles service reps have to cover, so presumably the more labor and other operational necessities.  So, what if we priced distribution service on a flat rate, based on the size of your service drop (as a proxy for peak load) and distance from the nearest substation (as a proxy for overall length of lines needed to serve)?

One economic incentive would be to build (or remodel) in such a way that a household or business could manage with less of a service drop.  This creates some economic incentive for customer-side distributed generation and storage.  To a certain extent this already happens in existing tariffs, but the incentive could be increased.

Another incentive would be to locate new builds proximate to existing facilities, to use "brownfield" scenarios rather than "greenfield."  There could be a number of societal benefits there.

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