Peak-Load Pricing

Electric utilities rightly view price discrimination as critical to the success of their business. Residential customers may be dismayed to discover that the electric company routinely charges industrial users of electricity significantly lower prices. In some circumstances their may be a countervailing benefit when residential customers are prioritized when the lights go out. But if you're unlucky enough to live miles away from the nearest company executive, your lights may stay out for more than a week at a time in the event of a disruption.

Electric utilities produce a more or less constant supply of power all day long. At the peak of daily energy usage, when air conditioners are drawing maximum energy all over town, the electric utility is ideally using almost all of its capacity. But at night, a similar amount of power is available. And making that electricity available, whether it is used or not, costs the utility money.

Electric utilities that use peak-load pricing seek to encourage their consumers to shift the time of their electricity usage away from the heat of the day. Savvy industrial users that can shift to nighttime production might see big cost savings, but the average residential user isn't likely to turn off the air conditioner when it gets hot. Resources are better spent on additional insulation and other energy saving technologies than on additional power plants.

If the electric company can avoid building a new power plant, then all of its customers are likely to see a big price break. Yet in practice, peak-load pricing has come to be associated mostly with higher electric rates just when you most want to run the power.

Peak-load pricing has been embraced in other areas that electric power generation. Congestion pricing of the sort that has been imposed in London and proposed for New York City follows similar logic. Just think of it this way: If Mayor Bloomberg loves peak-load pricing, shouldn't you?