The Problem with Home Electricity Pricing

Smart meters, home energy monitoring devices, time of day energy pricing have all been created in an effort to help consumers save more on their monthly electricity bill. Some of these devices help, like the home energy monitor, because they act as a educational tool for the homeowner. Other aspects aren’t as effective and here’s why.

Take a closer look at your next electricity bill. Here’s a look at one:

Most people, myself included, keep a running tab of monthly expenses in their head based on what they actually pay each month. If you’re like most people you probably think you “use” about $100/month in electricity every two months. Well when you look a little closer you see that less than half of that amount is actual usage, the rest is made up of various extra charges by the provider.

In the case of electricity consumption their’s a big difference between the amount you use and the amount you get billed for. Only about 43% of the electricity bill above, Ontario resident, is based on actual consumption of the commodity.

Can you imagine the consumer outrage that would occur if wireless service providers had this model? There is absolutely nothing a consumer can do to affect a change on almost 60% of the total bill they receive from their electricity provider. So, what’s the incentive to reduce consumption? A 10% reduction in usage might save you $3-4/month. Big deal, I can save that much by cutting out one low fat latte a month.

In other provinces where electricity is the primary heat source and rates are higher, a consumer will likely experience a higher rate of savings. But, the ratio of fixed costs versus variable costs will likely be the same.

So where’s the economic incentive for households to reduce consumption? There isn’t much. It’s a flawed pricing model. In order to affect a material change in behaviour consumers need to have the right incentives and right now the pricing model favors the service provider not the user. If governments want consumers to use less or manage their consumption more effectively then they need to shift more of the pricing to a variable model. Get rid of the extra charges, build them in to the price of the service so consumers control 80-90% of the bill and then you might get some decent traction.

 

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