In the new energy economy, both consumers and suppliers will find themselves in non-traditional roles.
Illustration by Adam Niklewicz
“Teach a parrot the terms supply and demand and you’ve got an economist.”
That quote is sometimes attributed to 18th century British historian Thomas Carlyle, although no one knows for sure who said it. It was clearly intended as a dig toward any economic analysis that leaned heavily on those terms. Real economists may not be amused, but the long life of the quip does not diminish the terms’ value as a fundamental economic concept.
It has been helpful for me to view the energy economy through the prism of supply and demand, as we look toward a new energy future with new market forces and potentially new regulatory constructs. As it is in any industry, the economics of the energy sector are more complex than simply generating and distributing electricity (the supply) to energy-using consumers (the demand) at a market price.
In the new energy economy, there will be an unusual twist. The energy consumer will play an increasingly significant role on both sides of the equation. On the demand side, more efficient use of energy by consumers and the new technologies that are making that possible have caused volumetric consumption to plateau over the last decade. The supply side’s response has been as expected—a delay in building new power generation plants. However, one of the complexities in energy’s version of supply and demand is the factor of peak demand—that period when everyone is using energy at the same time.
Traditionally, utilities have needed to build enough power plants to meet that period of peak demand. While total megawatt-hour sales have been flat, peak demand has increased, and that’s the most expensive energy to produce. Utilities fire up their most expensive and least efficient plants to meet the last megawatts of the peak demand. How did suppliers respond to the increasing use of those expensive, inefficient plants? They planned for new electricity production that is cheaper and more efficient. But that is not the only solution.
Demand-side tools like battery storage, smart thermostats and switches on water heaters give consumers more control to reduce consumption at peak times. Behind-the-meter forces—that’s industry-speak for actions on the consumer’s side of the electric meter—are not limited to controlling demand. They can also work on the supply side. Solar energy’s improving efficiency and affordability have made the consumer a supplier. In what other industry does that happen?
A demand-side tool doesn’t have to be a piece of equipment. Mid-Carolina Electric Cooperative has implemented a revolutionary billing method that gives its members more control over their energy costs with a price signal that encourages shifts in the time of day when energy is used. It’s an example of the kinds of choices consumers need to be able to make in their own best interests.
The status quo will not remain regardless of whether we deregulate the energy market in South Carolina. Market disrupters have arrived, and more are coming. The questions that we should be asking revolve around how to adapt and how to prepare.
Consumers want and need more choices, more flexibility. How can we give it to them? Our generation infrastructure is aging. How do we modernize without overburdening our consumers? Can we achieve these goals under the current cost-of-service model, or is a regional transmission operator (RTO) necessary?
For the foreseeable future, we’re going to need large generation plants. There’s too much demand and too much dependence on the economies of scale of large plants for us not to. But in the new energy economy, we have the opportunity to transition to a more distributed, renewable energy-based grid.
Can we build together the smart grid that integrates distributed generation such as solar, storage such as batteries, and demand-side consumer-benefitting tools? A grid that allows for real-time communication between the supplier and the consumer can and should be mutually beneficial.
It’s going to take a commitment from policymakers and collaboration between stakeholders to enact these kinds of changes to our power system. The same is true if we’re transitioning into a new regulatory model. How will that transition, and eventual regulatory structure, accommodate and protect consumers? How do we ensure that everyone is served reliably and with choices?
These questions are important, not only in the context of an energy economy but also for kitchen table economics. According to a 2017 report from the Energy Department, the average South Carolina household has the third-highest energy burden (electricity bill in proportion to income) in the nation. This is not solely because of rates. South Carolina is a middle-of-the-road 33rd in that category. However, we use more electricity than the residents of 49 other states. Our houses are some of the least energy-efficient homes in the nation (we rank 42nd, according to DOE). We can assume that the statistics play out worse for our poorer citizens with less efficient housing, higher electricity use and lower incomes. Will the consumer who carries the heaviest burden continue to do so into our new energy future? Equipping them with demand-side tools like smart thermostats, load control switches and other energy products could lighten some of their load.
People in the telecommunications industry know about this revolution. Technological advancements disrupted the market and created a new infrastructure. In a generation, we’ve forgotten how to use a rotary phone, relegated payphones to antique stores and given up on memorizing our family and friends' phone numbers. Instead, in our pockets we now carry computers connected to the rest of the world. But as telecommunications consumers, what impact do we have on that market, beyond purchasing devices and using data?
It’s going to be different in the new energy economy, with new ways to supply and new types of demand. What may be most revolutionary is the potential empowerment of the consumer to have a greater ability to participate in the market. I hope we can embrace that change and prepare for it. I hope we can learn the lessons from our past and others’ experience.
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This is the third and final column in a series on utility deregulation. To review prior columns, see:
Questioning deregulation—Lawmakers will need to ask some hard questions before attempting to alter South Carolina’s electricity market.
Overpriced tulips and our energy future—The utility sector is changing and electric cooperatives are working with the state legislature to study what that means for co-op members.