When energy conservation works too well?

So last night, I saw that there was a vote in my state senate regarding rate hikes for electricity. Obviously, the argument against the rate hike was to reduce the cost to consumers. The argument for the rate hike, as supposedly given by the electrical company was that lower demand has resulted in the need to correspondingly increase rates.

At the onset, it sounds like the argument for rate hike is complete and utter bullshit - the electrical company just wants more money.

Here’s where things get start to get interesting. Someone pointed out that the decreased demand was due to energy conservation measures, in part sponsored and championed by the energy company itself (probably in the form of rebates, energy audits, etc - which are all funded by GasNetworks, not the energy company - but that might be splitting hairs). In other words, the energy conservation effort worked a little too well.

And here is where things get really interesting. I mentioned this to my wife, and she pointed out that while the demand for the product (electricity) has gone down, the cost of getting the product to people’s homes (AKA delivery/transmission charge) would not have changed. There are still thousands upon thousands of miles of electrical cable strung up on telephone poles that need repairing, and all kinds of other maintenance required to ensure that when I flip the switch, the light goes on.

So it got me thinking - is this sort of industry one that is built upon constant expansion, and how will it survive a long term reduction of demand? For many years, the idea was to keep putting up wires, increase delivery bandwidth, feed more electricity to the grid because consumers demand it. So when the demand diminishes, all that infrastructure, and the maintenance required to keep it going, doesn’t just disappear.

I just find it an interesting quandry, and an example of how things aren’t as simple as they may initially appear.

To add to the quandry:

If they raise prices they will depress demand even further.

History has shown that improvements in energy efficiency (somewhat related to energy conservation) doesn’t reduce demand. The Jevons paradox.

This is the classic realization that every business has fixed costs, and variable costs.

If you sell less product, you can reduce your variable costs, but you can’t easily reduce your fixed costs. So if you sell less, you have to raise your price per unit to cover your fixed costs, or else go out of business.

As for predicting a long-term reduction in demand, I doubt very much this will happen. As gasoline gets more expensive, we’ll be using that excess capacity to power electric cars and plug-in hybrids.

So wait a minute - are you telling me that this fancy wheel I just came up with isn’t a new invention?

Damnit.

This is what we called in B school a stairstep variable (although in reverse). Over time, you can reduce the fixed costs, but we’re talking many years. Other examples would include cable companies, railroads, restaurants, etc.

Some reduce quicker than others (labor especially), some take forever (T&D).

I’m sure that some portion of that demand reduction is due to reduced economic activity–involuntary conservation.

Actually, much of the infrastructure was not considered profitable to build in the first place.

My county is served by one of those telephone cooperatives to this day.

And still today, a rural distribution line has higher per-customer maintenance costs than a bigger distribution in a city. Rural customers generally pay for this in more frequent outages and longer delays in restoration, rather than higher rates.

Meh, in the last year I’ve received several letters from my electric company explaining price hikes for the following reasons;

  1. The rising price of oil (and they don’t actually have oil burning power stations)
  2. The falling price of oil
  3. Rising costs of infrastructure (which they don’t own, or maintain)
  4. Rising office costs (I checked, apparently each person manning a phone makes more than 2 million a year based on their numbers)
  5. Increased demand
  6. Decreased demand

And one letter explaining how since we’re so loyal customers they’re giving us a price cut; unfortunately their idea of price cut actually made my electricity cost 4% more per year.

Or break down the costs you pass on to consumers into fixed costs and variable costs. So just put on the bill that it costs $X per month to be connected to the grid at all, and $Y for each kWh. That way, if usage goes down for whatever reason, you’re still covering your fixed costs, and don’t need to raise the rate for the variable costs.

I had thought, in fact, that most electric utilities already did this. Don’t they?

They usually have a fixed part and a rate part to the bill, but the fixed part doesn’t actually cover fixed costs. At least not where I am, it surely doesn’t.

Where I live, here is a ‘generation’ charge, and a ‘delivery’ charge. It would make sense that generation charge is variable with respect to cost of fuel, which would probably be more volatile, and the delivery charge is the all-encompassing expense of maintenance.

I’d also think that there are probably plenty of other costs that are hidden in there. Like, most of the power stations here use natural gas - so would the cost of getting said gas from a field down south to up here in the northeast fit under generation (since we’re talking about fuel acquisition) or delivery (since we’re talking about transport).

I suppose it doesn’t really matter. My point being that I wouldn’t be surprised if one of the charges subsidizes the other, in order to make things appear more customer-friendly.

GHO57 - gotta love that logic. No matter what the change, its cause for an increase! Buying gas in the winter? That’ll cost you because there are additives. Buying gas in the summer? That’ll cost you because of the summer blends.

How do I get a job as a phone operator at your electrical company? :smiley:
Step 1: answer phone
Step 2: ??
Step 3: profit 2 million bucks.

But this is not correct – with decreased demand, the costs to maintain the grid go down, too.

Much of the electric grid in the USA is near capacity now – often over capacity on hot summer days. And it’s the running at near maximum capacity that causes failures and the need for repairs in the grid. Wires carrying a near maximum get hot, and expand, only to cool and shrink at night. The movement of this expansion & contraction causes wear on the wires, and especially on the connections. Transformers operating at max capacity get very hot (and in summer the oil that cools them is already hot) and burn out.

The majority of repairs to the grid are caused by running it at capacity or even overloaded, and so these repair costs should decrease as demand decreases.

But the power company is not really concerned about power delivery costs, but in profit per share. So they want to keep their profits up, despite a reduction in demand. So they ask for a price increase.

Your example makes sense, but I think it’s also fair to say that neither my original claim (cost to deliver energy does not change), nor your example above fully closes the book on the concept.

In other words, you are probably correct in that the maintenance costs do decrease, because with more conservation there will be hopefully fewer over-peak days that cause breakdowns. However the great unknown is the degree to which they go down - only someone who pours over the accounting books at an electrical company would know that. If the maint costs only decrease, say, 5% - yet demand falls by 30% - you still have a scenario where maintenance costs have not dropped in lock-step with demand.

Is that really the main source of maintenance costs? I would have expected it’d be things like a storm blowing tree branches to down power lines (which don’t really have any connection to usage).

Downed power lines from storm blown branches, or an overload of ice, drunks knocking down poles, etc. are the most common causes of power outages. But they are cheap ones to fix – basically, just get a crew out there to splice the lines and get them back up again.

Over-load related maintenance is less frequent, but much more expensive. Blown transformers & switching gear has to be replaced with new, and that stuff is not at all cheap. And running at max capacity puts increased wear on the power lines; sometimes leading to them having to be replaced prematurely. Replacing several miles of power lines is less frequent than fixing a storm-broken line, but costs a lot more.

Can anyone cite a region of the country where electrical power demand has decreased? If so, I suspect it’s more a case of shuttered houses and businesses than conservation.

New Orleans since Katrina?
Which probably confirms your second item.

I get the same thing, and in addition I fairly often get offers from a number of companies wanting me to switch from my current electricity and natural gas provider (National Grid) to their company for either electricity or natural gas. I’m always told that no matter who I buy from, National Grid will continue to be the one who actually delivers the electricity/gas and is the one who is responsible for maintenance, repairs, billing, etc. Often they promise locked-in prices for some period of time and often other incentives as well (gift cards, frequent flier miles, credits to other reward programs, etc.) I’ve never switched, partially because I’m lazy and partially because I expect a catch, similar to intro rates with cable or telecommunication companies.

The same effect has been seen with water conservation. Cities make big pushes for people to reduce their water usage, and then put in massive rate hikes because people aren’t using enough water to pay for the fixed costs.

I think your initial impression is probably correct.

Not really. Demand for electricity- unlike gasoline- is pretty inelastic.

Think about it: you won’t drive across town to do your shopping when gas prices are high, but you don’t refrain from watching TV because electricity costs are high.