Consumers Would Cut Back on Energy Use If They Knew Specific Costs

By Kristina Fiore And Katy Stech, August 22, 2006

As temperatures approached 100 degrees during this month’s heat wave, many Long Island residents pushed up their air-conditioner settings to stay comfortable — in some cases, to make their homes livable.

But those adjustments also helped push electricity consumption to record levels despite appeals from the Long Island Power Authority for people to cut back or risk outages. The increased consumption, in turn, leads LIPA to continue to develop more sources of power to meet the demand, at a greater expense to ratepayers.

Even though consumers end up paying more, conservation advocates say, the value of turning off appliances is not obvious. “[Consumers] don’t pay nearly enough attention to conservation and efficiency because they don’t have any sense of the cost of production that’s not included in the kilowatt-hour charge they see,” said Tim Profeta, director of the Nicholas Institute at Duke University, which acts as a liaison between researchers and policy-makers.

For example, during the heat wave in early August, wholesale electricity prices soared as high as $1,300 per megawatt hour, compared with regular rates of about $200. That’s a 550 percent difference, but the average consumer wasn’t aware of that.

The higher hourly wholesale price for that day doesn’t show up separately on the utility bill; it is simply averaged out into a higher kilowatt-hour charge for the month.

By comparison, in the days following Hurricane Katrina last year, gasoline prices on Long Island jumped only about 25 percent, according to American Automobile Association data, and immediately the public jerked into action, consolidating or cutting out errands that required driving, switching to public transportation when they could, and shopping for smaller cars.

The difference? Although the cost of each mile in a car is clear, the cost of running air conditioners is not — at least not until weeks later when the LIPA bill arrives.

In addition to paying higher wholesale electricity prices when demand is high, power companies have to find ways — building cables or plants and paying for contracts guaranteeing a power supply — to increase its electric capacity to ensure future demand can be met. Already, each LIPA customer pays $136 each year just for the ability to turn on that air conditioner during a hot day. That’s because the authority contracts for $150 million per year with power producers for “capacity payments,” to ensure the power will be there when needed.

In the past 50 years, national electricity consumption has increased tenfold, according to the Department of Energy.

To meet local demand, LIPA has increased its capacity to 6,200 megawatts from 4,700 since 2001. And the authority is proposing an additional $3 billion worth of new projects during the next five years: a 660-megawatt Neptune Regional Transmission System cable that will import power from New Jersey, a new power plant in Yaphank and the South Shore Wind Park.

In addition, LIPA has said it would investigate repowering the E.F. Barrett plant in Island Park and building another new plant or cable to meet anticipated demand in 2010.

“If you had the AC on [during the heat wave], you can’t oppose these projects,” LIPA chairman Richard Kessel said.

If consumers want to see bills go down, they need to change their attitude about conservation year-round, Profeta said. He said, however, Americans “are hard to reach in terms of changing their behavior.”

As homes have grown larger in recent decades, they require more energy to heat and cool. The increase in household electronics, including multiple televisions and computers, puts additional strain on the electric systems, though consumers seldom realize it, experts say.

“A lot of people building large homes may not be price-sensitive to energy,” said Ashok Gupta, director of the air and environment program at the Natural Resources Defense Council.

But, Gupta said, the responsibility goes beyond consumers. LIPA could do more to encourage energy-efficiency awareness, he said, as investments in conservation efforts pale in comparison to investments in infrastructure.

Utility companies only benefit from encouraging conservation during peak times, when blackouts would be costly, he said. During the rest of the year, utilities want to sell as much energy as possible to maximize their revenue. “They like their customers to not use as much electricity on hot days but use as much as they can other times,” he said.

LIPA sponsors some energy-efficiency programs for homes and for businesses, LIPA spokesman Bert Cunningham said. In addition, the company is considering implementing a 500-megawatt energy-efficiency program, which would consolidate and expand LIPA’s current incentives.

But some groups are calling for more radical energy-saving programs.

In Illinois, the nonprofit Chicago Energy Cooperative has negotiated with Commonwealth Edison utility to create a program letting energy users see how much each kilowatt hour will cost on any given day. The reasoning is that putting a price tag on electricity makes it like a store purchase in which a specific item has a specific price. Because consumers can see upfront when a purchase will be pricey, they can decide whether they want to spend the money.

Chicago resident Anthony Star, program manager for the cooperative, can, through its Web site, check his usage and the price of electricity for any given hour. Once, when Star was looking over his electricity consumption chart, he noticed a sharp spike one Sunday morning. That was the morning he used his electric waffle maker.

Real-time pricing lets customers see the cost of using appliances and shows them the amount of money they save on usage cuts, Star said.

Each evening, consumers can check electricity prices for the next day. If prices are expected to go above 10 cents per kilowatt hour, customers receive a phone call from the program.

“The concept is good because it really tries to bring the market directly to the customer,” said Ricardo Austria, an energy consultant in Albany. “The customer has a choice hour-by-hour whether or not to use that energy. And hopefully [he or she] will make the right choices.”

So far, numbers show that Chicago participants are doing just that. On hot summer days, they used between 15 percent and 20 percent less electricity than other customers, Star said.

The federal Energy Policy Act of 2005 requires all utility companies to determine if it makes sense to offer real-time pricing to customers. The act, though, doesn’t set a deadline.

On Long Island, Cunningham said the Long Island Lighting Co. experimented with real-time pricing among commercial customers before LIPA took over but had little success. “We have not had the kinds of requests from customers to explore real-time pricing,” he said.

Solutions such as real-time pricing get both utility company and customer to work together to conserve, which is what analysts say can help solve the problem of constantly increasing electricity demand.

“It’s the problem of the tragedy of the commons,” Profeta said. “No one person can solve this on their own.”