In a recent article we argued how unwise it is for electric power companies to use electric power consumption (KWH consumed) for allocating their charges for delivery of power to individual homes and businesses. To be clear, charges for the power itself (as opposed to delivery of that power) are sensibly billed as a fixed charge for each KWH consumed; it is the delivery charges that we focus on here. From an economic standpoint, this is clearly a mistake because with that approach there is but insignificant rational connection between delivery costs for the power company and charges to customers.
Still, throughout this country, this is how customers' delivery charges are determined, a fixed charge for each KWH of grid-power. It is a widespread and longstanding habit, but especially now, a bad one. And it is not surprising that bad habits can, in time, inflict damaging consequences.
The true costs experienced by a power company for delivering electric power are driven largely by the capital costs for building and maintaining the electric grid. Heavy copper wires and the poles needed to support them are unavoidable expenses and so are the switches, transformers and the like that are needed for delivering the power. Added to these are ongoing costs for maintaining the grid, costs that can be particularly high when there are storms. No doubt these particular costs will increase with our now-warming earth. And of course there are also the costs for pay and training the workforce and the costs associated with equipment buildings and land. There are many costs and in one way or another the power company must be compensated for all of them if there is any hope of having electric service. Unless the power company is a public service, these costs are paid by power-company customers, but how those costs are allocated among the customers is what is at issue in these articles.
Delivery costs are not driven by the amount of electricity consumed so long as the existing grid is able to support the change (as is usually the case) and that is why it is foolish to base the allocation of costs on measures of consumption. The grid is built to support what invariably exceeds what is ever consumed. It can easily accommodate wide variations in consumption without changing the costs experienced by the power company.
The present way of allocating costs is a longstanding habit that needs to change. The urgent need today for reducing our dependence on fossil fuels has become an important new consideration. In the earlier article, Perverse Delivery Charges, we saw that, because of this bad habit, consuming additional electric power from the grid is excessively costly and so customers are more cautious than they really should be about using the available grid-power. In this article we examine the opposite consideration, namely that cutting consumption is a more attractive proposition than it should be. We will see that a consequence of this is that delivery charges for each KWH can be expected to spiral upward so long as power companies persist in the habit of charging for delivery on the basis of use. Costs to the power company are bills the company must surely pay out of customer payments, but the misleading way these costs are allocated among customers leads to additional complications.
Here is the issue. The KWH billing policy (what we might call delivery-billing) causes unduly high marginal costs for consuming electric-grid power. So customers are motivated to reduce their consumption of electric power from the grid but, as noted above, such changes in consumption in no way reduce the costs of the power company; the changes merely reduce the income of the power company. The company responds by petitioning for an increase in their delivery-charge rates because, to them, that seems the only way for it to recover the income they need and expect. But another way would be to change the charging structure to be based primarily on the service level; two customers who have the same class of service should in principle pay the same monthly service charge regardless of how much power they consume. Likewise, if two customers consume the same amount of power, the one with 1000-amp service should reasonably pay roughly ten times the service charge as the customer with only 100-amp service. This would be service-billing, a better approach than the current delivery-billing.
Under delivery-billing, customers who reduce or eliminate their use of grid-power can shift the cost of their service to other customers. Despite paying less, these customers retain the capability of drawing on the grid whenever necessary. Maintaining that greater capability remains the major expense for the power company but in the extreme, the customer may entirely avoid paying a delivery charge, allowing the customer this valuable backup service/insurance at no cost. In the service-charge model, the customer would still be billed to cover the costs to the power company for the still available service level.
Today, the costs of solar panels continue to fall. As a result, there is an increasingly convincing argument for homes and businesses to install panels so as to reduce their use of grid-power. Faced with reduced income from such installations of solar panels and fixed (no doubt actually increasing) costs, the power company has no choice but to petition for yet another increase the KWH charges. In turn this further increases customer motivation to install solar panels and draw less power from the grid. There is an upward spiral of KWH cost to customer that compensates for the downward spiral of grid-power consumption.
Although every customer feels driven by rising delivery rates to consume less grid-power, not all customers find this to be practical. Some customers may instead choose to substitute fossil fuels while others will be unwilling to take that step. The increasing costs for grid-power will burden most the people who are unable to install solar panels.
Renters, for example, cannot install solar panels. And some privately owned homes are poorly situated for solar panels. Perhaps a home falls in the shadow of a taller building or perhaps in the shade of a tall wall, a mountain or perhaps trees.
Also, even today, installing solar panels still takes a significant capital investment that will be recovered only over several decades; the elderly, who do not expect to live so long, are apt to find such a long-term investment particularly unattractive even if they can find bank financing for the project. The poor may be unable to get financing even if they could. The elderly and the poor seem destined to shoulder a disproportionate burden from this upward spiral of delivery charges that so naturally follow from the ill-considered practice of delivery-billing.
Notice however that the downward spiral of grid-power consumption can be viewed as, in itself, a virtuous cycle. It is good for the environment and good for the world when solar-power production can be substituted for burning fossil fuels. The problem is the accompanying upward spiral of grid-power prices and the fact that these price increases are felt mostly by the poor and the old.
An obvious counter-strategy might be to delay changing to a service-billing for a few years but, over those few years, provide government subsidies to power companies to compensate them for a rollback and subsequently stable KWH prices. That would allow the virtuous fall in grid-power consumption while shifting the cost away from the poor and old and onto taxpayers more generally. There is a problem with this solution, however, and that is the view presented in the earlier article, Perverse Delivery Charges. In those intervening years before service-pricing is adopted, customers will continue to be discouraged from switching from fossil fuel consumption to electric-grid consumption.
