Why the electricity demand curve slopes upward, and why that matters.
Conventional demand curves slope downward – when the price of something decreases, the quantity demanded increases. The electricity demand curve however, goes the other way. The thing is, it does not have to be that way. If you can change the direction of a consumer’s electricity demand curve, you create an economic opportunity for that consumer. Understanding this curve therefore is key to disrupting the electricity market.
So why does electricity demand slope upward?
A few reasons.
First, electricity is dispatched based on the lowest marginal cost i.e., the cheapest power gets produced and sent out to the grid first. This is because every extra unit of power requires resources that are increasingly expensive. Coal-powered electricity goes first, then hydro, nuclear, gas and so on. So, as consumers use more power, they are buying increasingly more expensive power.
Second, electricity demand is inelastic i.e., an increase in the price of electricity does not force a decrease in demand. Electricity is much like Cable TV or the Internet, an essential service provided by a few monopoly providers – you cannot do much if you’re pissed off about the price. If you need it, you need it.
Third, and this slightly relates to the previous reason, consumers have imperfect information. Even if consumers wanted to manage their consumption in response to higher-priced electricity, they do not have the signals that enable them to do so. Electricity is billed at the end of the month and all the information they have is after the fact.
Why does this matter?
If you think of the three reasons above as cost-problems for customers (and they are!), solving those problems creates savings opportunities.
Using renewable energy for electricity helps solve the first problem, since the marginal cost of producing solar or wind-powered electricity is zero. And as Danny Kennedy elegantly puts it, zero-cost electricity is pretty good.
Think about it this way. We’re killing people in foreign lands in order to
extract 200-million-year-old sunlight. Then we burn it … in order to boil
water to create steam to drive a turbine to generate electricity. We frack our
own backyards and pollute our rivers, or we blow up our mountaintops just
miles from our nation’s capital for an hour of electricity, when we could just
take what’s falling free from the sky.
Real-time visibility of power consumption helps solve the second (inelastic demand) and third (imperfect information) problems. Given that the U.S. alone spent $318 billion on electricity in 2011, think of the multi-billion dollar savings opportunity from millions of homes, factories, buildings, appliances and people making smarter decisions and shifting demand based on the price of electricity. Now think of all the technology, analytics, manufacturing and infrastructure opportunities that will need to exist to make that happen.
This explains the emerging new industries for renewable energy generation and electricity demand management. There is a revolution waiting to happen, and it will all start by changing the shape of the electricity demand curve.