By Robert Earle and Ahmad Faruqui
Several developments have played into this expansion. Growing economies from the oil-rich Middle East to developing economies such as China and India have found themselves faced with soaring electricity demand as a result of their fast paced growth. However, the electric power infrastructure has failed to keep pace with agressive economic growth. As a result, many countries with rapidly developing economies are encountering power shortages and resorting to load shedding.
Last summer, industry in Saudi Arabia was subjected to load curtailments. In China’s booming Guandong Province, electric power demand is expected to grow by 13 percent this year over 2007 following power cuts that had harmful effects on industry last year. In both of these cases, while the short term solution has been load shedding, in the medium to long term the use of dynamic pricing or demand response supported by smart meters could go a long way towards alleviating the problems. Compared to the costs of hurting industry through load shedding and therefore damaging economic growth, dynamic pricing would better allocate the use of electric power by reflecting its costs.
Other places such as Pakistan have had both robust economic growth along with shortfalls in capacity due to two reasons. The first one is the low release of water from the dams, which limits the amount of hydroelectric power that can be generated in the country. The second is the suspension of gas supplies, which affects the amount of power that can be generated from thermal power plants. As a result, the Pakistan Electric Power Company (PepCo) has begun implementing a four-hour load shedding programme.
Increasing costs in North America are driving the need to conserve energy and avoid building new capacity. Since the turn of the millennium, natural gas prices have increased approximately four-fold. Because natural gas is often the price setting fuel (the marginal fuel) in electricity markets, this has caused a concomitant rise in electricity prices. Moreover, the cost of construction of new generation plant has increased by some 30 percent in the past several years. Some of this is driven by the same economic growth in India and China that is driving demand for electricity in those countries. Increased economic growth in China, for instance, has increased the worldwide demand for commodities such as steel that go into making new power plants, thus driving the price of construction up.
So what is being done on the demand side of the picture to address these increased costs and shortages? As mentioned, some locales such as Saudi Arabia, China, and Pakistan have resorted to systematic (and sometimes random) load shedding programmes. Because these are involuntary and can be indiscriminate, they can be quite disruptive to industry. The World Bank has estimated that such programmes can knock off a few percentage points from the Gross Domestic Product (GDP), as has been the case in Tanzania. Fortunately, there are better alternatives. In the near term, information programmes can be used to induce behavioural change among customers.
In the medium term, financial incentives and cash rebates can be used to improve the energy efficiency of appliances, industrial processes and buildings. And, over the longer term, economically rational price signals can be used to balance demand and supply.
A comprehensive portfolio addressing the demand side includes several elements: a mass media campaign, broadly defined financial incentives, targeted financial incentives, quotas on energy use, financial incentives for curtailing peak loads and time-based pricing programmes.
A MASS MEDIA CAMPAIGN
Information can be the most effective way to convey the scarcity of power resources to all customers, broadcast through a variety of media channels, including radio, TV and newspapers, and further emphasised by the involvement of leading celebrities.
During its power crisis in the years 2000-01, California introduced a “Flex Your Power” campaign to create customer awareness about the shortage and to create a culture of energy conservation. Surveys indicated that customers took a number of behavioural actions such as turning off lights, not using their air conditioners or raising the thermostat set-point, unplugging computers and appliances and watching less TV.
The hydro-dependent power system of New Zealand was faced with a power shortage in the year 2001. It introduced a “10 for 10” campaign designed to reduce power consumption by 10 percent over a 10-week period. It worked. When a hydro-based crisis reappeared two years later, the campaign was reactivated. Celebrities were recruited to remind the people of the drought, the need to conserve energy and to list specific actions that customers could take in that regard.
BROAD-BASED FINANCIAL INCENTIVES
During its energy crisis, California introduced a programme called Energy 20/20 that gave customers an extra 20 percent reduction in their energy bill if they reduced their energy usage by 20 percent compared to a baseline period. This programme reduced power demand by 14 percent.
TARGETED FINANCIAL INCENTIVES
The Ceylon Electricity Board bulk purchased compact fluorescent lamps and made them available to customers at below market prices. In Victoria, Australia, incentives were used to promote high efficiency chillers in office buildings and other commercial facilities.
QUOTAS ON ENERGY CONSUMPTION
Faced with a power shortage brought about by a drought, Brazil established mandatory targets for saving energy. Most households had to reduce usage by 20 percent. Industries and government buildings had targets of 15-25 percent while public lighting had a target of 35 percent. Customers who did not meet the targets were subject to interruption of supply. In addition, consumption in excess of the quota was subject to price increases ranging from 50-200 percent. To assist poor customers, the government purchased 5.6 million compact fluorescent lamps and gave them as a grant. The programme reduced energy consumption by 20 percent. Later on, when faced with a power shortage, Argentina successfully implemented a similar programme.
FINANCIAL INCENTIVES FOR CURTAILING PEAK LOADS
The utility provides incentives to customers who are willing to reduce load at short notice. They require the installation of new digital, interval meters and are most often implemented for larger commercial and industrial customers.
In Western Australia, a resource shortfall was triggered in February 2004 by extremely hot temperatures and restrictions of gas pipeline capacity. The utility, after holding discussions with its 250 largest customers, introduced a programme that targeted customers with peak summer demands greater than 500 kW and a load reduction potential of at least 200 kW per site. One-to-one meetings were held with customers and they were provided with information packets to identify savings opportunities. In addition, customers were offered an incentive payment based on the amount of load curtailed during the top 50 hours. The programme was very successful in meeting its goals and achieved high levels of customer satisfaction.
TIME-BASED PRICING PROGRAMMES TO REDUCE PEAK LOADS
These include time-of-use, critical peak pricing and real time pricing rates. Such programmes can achieve load reductions in the range of 10 to 20 percent of peak demand. Since these often involve the change-out of existing electricity meters with digital interval meters, they take more time to implement than the previous programme options and are best viewed as an important but long term option.
The precise mix of demand side programmes that a utility should consider offering its customers will depend on the magnitude and duration of the shortfall. A mass media campaign can be very effective in reducing demand in a very short amount of time. It does not take much time to develop a sophisticated media strategy. In the messaging, it is vitally important not to blame consumers for using too much energy and equally important to convince them that their individual actions will make a difference. If the shortage occurs during peak hours, consumers must also be informed when to conserve. And, of course, consumers need to be educated in how they can conserve. Humour is an important asset in such communications, as demonstrated in New Zealand where one of the ads featured the line, “If you sing in the shower, choose shorter songs.”
Another near term strategy is to focus on the large commercial and industrial customers who often account for a large amount of power consumption and who may be best able to respond to programmatic incentives and information. However, over the long haul, it would be useful to involve all customer classes and to develop a long term demand side management plan, including dynamic pricing through smart meters.