C4FE Economic Insights #5

Heatwaves and High Demand: Dynamic Electricity Pricing is Not Your Enemy

The Center for Free Enterprise's latest Economic Insight is out. In this case, Karla Hernández discusses the role of dynamic prices in the energy sector.

The summer of 2023 was Texas’ second hottest on record, with El Paso experiencing a relentless heatwave where temperatures soared over 100 degrees (F) for 40 consecutive days. This extreme weather in El Paso led to unprecedented electricity consumption levels in the region. El Paso Electric witnessed the highest demand rates last summer, largely due to the widespread adoption of refrigerated air conditioners in El Paso homes. With summer 2024 drawing nearer, it is crucial to reexamine electricity demand and pricing strategies in response to recent weather variations in El Paso. Such heat conditions underscore the necessity for efficient energy management and understanding dynamic pricing to maintain grid stability and promote efficient energy use for consumers.

Dynamic pricing adjusts electricity rates at different times of day and year to reflect the varying costs of electricity supply. This method is crucial because electricity must be used as soon as it is generated and cannot be easily stored, and demand fluctuates with lifestyle and weather conditions. Electric systems often maintain reserve 'peaking' generation capacity to handle sudden surges in demand. According to Benjamin Hobbs (Johns Hopkins Environment, Energy, Sustainability and Health Institute), using dynamic pricing to manage scarce capacity can reduce long-term costs. It discourages building unnecessary extra capacity and motivates consumers to adjust their usage times. This pricing strategy effectively incentivizes consumers to reduce their energy consumption during peak periods, helping to stabilize the grid and lower overall energy costs.

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