Campus expert offers solutions to energy crisis

By Jeff Holeman, Public Affairs

24 Jan 2001 | While there is no painless solution to California's growing energy crisis, real-time pricing is a promising fix, according to a leading Berkeley economist and power expert.

Speaking at the Haas School of Business Jan. 19, Severin Borenstein said deregulation of the electricity industry was a good move for the state, but there were obviously mistakes in how it was done.

Although Borenstein cites a variety of causes for the current crisis, the basic problem is a matter of supply and demand, he said. Usually, the two intersect and markets are more stable. In California's energy market, the two don't intersect "at any reasonable price," he said.

So state and utility leaders must find a way to stabilize demand or supply. Stabilizing demand is the easiest short-term fix, Borenstein maintains. And the smartest move now, he said, is for utilities to institute real-time pricing, providing monetary incentives for consumers to conserve.

With real-time pricing, prices fluctuate based on demand. During high-demand times - like the summer - prices would rise significantly, perhaps even minute by minute.

"Voluntary conservation days don't work, so problems occur in high demand," said Borenstein, director of the UC Energy Institute and professor of public policy and business administration at the Haas School of Business. Instituting real-time pricing will give consumers an accurate picture of their consumption. They'll know when power bills will be high, and will be motivated to conserve.

Technological concerns will be a hurdle to real-time pricing. Metering devices would be required for each user, and those meters could not be installed before this year's peak summer period, Borenstein said. But the utilities could install them relatively quickly for business customers, he noted.

This model also transfers the highest cost to the largest users of electricity. "If somebody's going to be worse off, it might as well be the major consumers of peak-time power," Borenstein said.

To help on the supply side, utilities could enter into long-term contracts to purchase power from suppliers. With these contracts, power generators and utilities agree on a proposed price over a set period. And even when the price per hour goes above or below the set price, utilities are locked in over time to that perceived affordable, long-term price.

But utilities should have done this at the beginning of deregulation, Borenstein said, because they can't negotiate the price now.

"It's like with insurance," he said. "Once your house is on fire, it's hard to get a good price on a policy."

Long-term contracts don't always save utilities money, and politics often come into play, Borenstein noted. So they're probably not the key to reducing prices. And they don't build power plants.

To meet peak demands and problems with supply, he said, the state needs more power plants. But, people don't want to build plants because they are "ugly, they pollute (the environment) and lower property values."

So real-time prices are the better option, Borenstein contends. If the state had real-time prices, there would not be as great a need for more plants - making that option "good environmental and economic policy."

Utility customers shouldn't expect quick relief though, because there are too many factors involved. And the worst may be yet to come.

"It's not going to be pretty. We are going to pay a lot for power, especially in the summer."