Marketplace ran a piece this morning complaining that regulators in California won't allow the electricty companies to charge higher prices during periods of peak demand, and therefore there is no incentive to introduce innovations that can reduce energy use. This claim misrepresents the key issue. The point is to give consumers an incentive not to use energy when demand is high. One mechanism to provide this incentive is to charge higher prices during peak hours. Another way to provide the same incentive is to give rebates for lower than normal electricity use during these hours. This can be done if electricity companies establish a baseline, which would be based on year-round average usage, and then give large rebates for peak hour electricity use that comes in below this baseline. The technology for providing a rebate against baseline usage is essentially the same as the technology needed for charging higher fees at peak hours. The main difference is who gets the money, the consumer or the electricity company. So, we can provide the right incentives for conservation, if Marketplace radio doesn't mind letting consumers pay somewhat lower rates. (Actually, we can raise average rates so that the deal is a wash in aggregate.)
--Dean Baker