A Small Test of Price Theory

I like a decent cup of coffee with my breakfast.  Usually the water is boiled in our electric kettle.  But today we put the water in a saucepan and boiled it on our gas hob.  Why?  A fault with the kettle?  A power cut?  No, just rational economic behaviour in response to price.

For almost a year we have been taking part in the Low Carbon London Smart Meter trial, a voluntary trial of smart meters by our electricity supplier, EDF Energy, and partners.  In the cupboard under the stairs where our old meter used to be, we now have a modern meter that sends out half-hourly readings by wireless.  Periodic visits by meter-readers are a thing of the past.  In our kitchen we have a monitor giving information about our electricity usage and its cost at various scales (current, last hour, daily, monthly).  This has helped in managing our usage.  For example, I had vaguely assumed that having a shower took about 5 minutes, but it is clear from the monitor that the shower is often on, using electricity, for considerably longer.

EDF Energy have now taken the further step of offering, for homes with smart meters, a special tariff known as Economy Alert.  This enables the company to make short-term changes in price in response to circumstances, and so use price to manage day-to-day demand for electricity.  There are three rates: normal, low and high.  The normal rate of £0.11 per kWh, which applies most of the time, is slightly below the rate paid by those on a standard fixed tariff.  Whenever the low or high rate will apply, we are given 24 hours notice via the monitor and by text, allowing time to plan.  The low rate of £0.04 per kWh makes it worthwhile, for example, to shift use of the washing machine into low rate periods, but my advice to family members was not to try too hard to take advantage of the low rate.  The high rate, however, is £0.67 per kWh, six times as much as the normal rate, so it is worth trying hard to minimise electricity use during high periods.

Today (from 5 am to 11 am) was our first daytime high period, and it was interesting to see how we responded.  Based on this small, non-random and unrepresentative sample, I would say that a significant price difference, clearly communicated, can have a significant effect on the behaviour of energy consumers.

Are smart meters, and variable tariffs such as this, a good idea?  Yes.  Could they help manage electricity demand in a way that most consumers would find acceptable?  Yes.  Could this help reduce carbon emissions and mitigate climate change?  Yes to that too, but only to a small extent, even if widely adopted across the world.  The problem of climate change is much bigger than that and needs big solutions as well as small contributions.

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