Ignoring the price signal

How much do prices affect how much electricity we use? It’s an increasingly relevant question, since changing when people and firms use electricity – usually to try to spread out short-term peaks – is often one of the first proposed responses to the current energy crunch. It would also seem to have an obvious answer – if electricity prices go up, from an Econ 101 perspective, use should go down. Some go so far as to say that exposing customers (and their devices) to real-time prices should even be enough to organize meaningful demand response, without virtual power plants or other middlemen.

However, it turns out people really like electricity. A new paper this month finds that prices matter less than you’d think – Kudela and coauthors find that price increases do little to change demand (a 10% rise in the electricity price cuts consumption by under 2% on average, over the short term). Even more surprisingly, the most careful studies reviewed find prices have next to no effect at all on electricity use. They also find that elasticity is higher over the long run than the short term – consistent with users adapting to higher prices through capital improvements, rather than behavioral change (think a more efficient dryer, not waiting until midnight to dry your clothes).

The findings here are not just surprising but also policy-relevant, implying both that price transparency won’t do much to smooth demand without paired technology improvements, and that firm capacity (generation that can be called on at times of peak demand) will likely continue to be needed, especially over the short term. To be clear, this isn’t an argument against peak-shifting as part of a larger energy abundance strategy (particularly when intra-day price-sensitivity can be programmed into automated devices), but it is a reality check on how most people think about and use energy.

Speaking of paired technology improvements, Massachusetts launched a residential vehicle-to-grid pilot program this month – exactly the sort of demand-smoothing technology the Kudela paper implies we’d need to actually get electricity demand to follow supply.