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Financial incentives for the adoption of solar energy design: Peak-load pricing of back-up systems
Solar Energy. Vol. 17, pp. 339-3,13. Pergamon Press 1975. Printed in Great Britain
FINANCIAL INCENTIVES FOR THE ADOPTION OF SOLAR ENERGY DESIGN: PEAK-LOAD PRICING OF BACK-UP SYSTEMS STEPHEN L. FELDMAN Assistant Professor, Graduate Schoolof Geography,Clark University, Worcester, MA 01610, U.S.A. and BRUCE ANDERSON Director, Total EnvironmentalAction, Harfisville,NH 03450,U.S.A. (Received 3 April 1975) Abstract--Most solar energy systems for the space conditioningof buildingsrequire a full sized back-up system for long periods of cloudy weather. If gas or electricity is a source of energy for that back-up system, not only does the buildingowner have to provide both a solar energy system and a back-up system, but the utility company has to build and maintain full sized facilities to provide for the demand by the back-up system during peak load conditions. One method to limit capacity design of utilities is to design a peak-loadpricing scheme which would tend to flatten the utilities' load curve. The scheme could also provide incentives for the installation of solar energy design that would use electricity or gas as back-up systems during off-Peak hours only. Indeed, the success of the diffusion of solar energy construction into widespread usage may depend upon such financial incentives to the consumer.
INTRODUCTION
Heavy demands are being placed upon resources which are requisite in the supply of energy to all sectors of the economy. In particular, due to exacerbating environmental costs, gas and electric utilities are hard pressed for fuels and supply capacity. Given the vast array of contractual and market arrangements in the supply of energy in the economy, economic and engineering examinations of only one set of energy technologies violate the most fundamental concepts relating to the efficiency of the energy supply system in its relation to the total economy. Also, since the shortages of energy generation and delivery capacity and fuels can be viewed as a problem in the disequilibrium of supply and demand parameters, attention to only the supply side of the market ignores the full potential for proper adjustments. The intent of this analysis is to examine the demand and supply of solar energy as an alternative technology juxtaposed against the demand and supply characteristics of electricity and natural gas. More specifically, solar energy technology will be reviewed to account for possible tradeoffs in the use of that technology with the usage of electricity and natural gas as stand-by or back-up systems at off-peak periods only. Studies have been made recommending the investigation and use of solar energy systems in building for space heating and cooling and for domestic hot water heating. The considerations of such systems for different geographic areas and economic sectors has been well explored. These studies, however, have generally been lax in not accounting for the impact of such systems upon the load curve of electric and gas utilities when the latter must be used as back-up forms of energy. Thus far, designs for systems using natural forms of energy are hampered by their usual inability to reduce peak demand on the
utilities. Therefore, the design of solar energy systems should account for the effects upon the utilities' load curve and subsequent alterations in their rate and financial structures. Most solar systems are designed in conjunction with fullsized back-up systems for use in periods of insufficient solar energy. If the back-up system uses gas or electricity as its energy source, the utility company's capacity must be sufficient in size to provide energy for the full heating and/or cooling demand of the building during the peak periods. The combined capacity dimensions for both the back-up system and the solar energy construction has inherent diseconomies for various accounts: 1. For building owners. The initial cost of providing heating and/or cooling systems is greatly compounded by the need to build two full-sized systems instead of the single conventional system. Neither of these two systems is used to the extent that the single conventional system would have been used. 2. For utility companies. The high capital and operating cost of equipment requires that the load factors on that equipment be as high as possible. Solar energy systems are usually designed to place occasional full-design loads of buildings on the utilities; peak weather conditions usually coincide with peak loading conditions. Thus, the building owner has to provide two full-sized systems, and the utility company has to provide another. As the use of solar energy increases, the utility companies will recognize this burden and will be forced to impose penalizing rates on solar energy users just as they have on "total energy systems". Such rates could almost surely inhibit the use of solar energy. 3. For the U.S. Natural resources and capital markets are strained in the U.S. by pressing societal needs. Building costs are now so high that added costs of two 339
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simultaneous space conditioning systems would even further constrict the already lagging construction industry. Economic and environmental constraints have all but stopped expansion of electric power facilities. In the U.S., the inhibition of energy supply expansion has far-reaching economic effects; solar energy can provide a major input into economic expansion. Obviously, the consideration of solar energy must be accompanied by a commensurate consideration of the power industry. There are short-run and long-run implications of solar heating and cooling as affectors of a utility's load curve. For example, consider the diurnal load curve for residential consumption. This curve shows an evening peak which would likely be affected in magnitude and/or duration by solar energy heating depending on sunshine conditions and solar heat storage capacity. This effect would save the utility considerable fuel costs in foregoing the extended use of its peaking capacity and save long-run costs associated with capacity design. However, the present metering and billing system does not allow the utility to compose a rate structure to pass on these savings to solar energy users. Since peak-load facilities are salient from the short and long-run perspectives, any design of solar construction should accommodate itself to the substitution of the utility's higher cost facilities. Generally, present solar energy technology for buildings have not been assessed with regard to making this substitution, nor have they been designed specifically for this purpose in the past. PEAK.LOAD PRICING OF STAND-BYSYSTEMS
The problem of peak-load pricing in economics is not without a large audience of theoreticians. Literally dozens of models of pricing policy have been formulated in the past two decades (e.g. [1-7]). After 5yr of intensive research, the French developed a rather sophisticated system of pricing for its industrial sector resulting in large saving in fuel and electricity capacity. The British are presently experimenting with a peak-load pricing using expensive metering devices in the residential sector for electricity.t While gas and electricity have essentially different supply conditions (storable versus non-storable), they are both part of the hierarchial and attentuated distribution systems characterized as being subject to peak-load criteria for capacity design. In this study, gas and electricity are two energy sources that will be considered as likely candidates for solar energy back-up systems. The purpose of this paper is not to derive another theoretical solution to the peak-load pricing policy since solar energy construction does not nullify the extent to which the present literature is valid. It is to simply apply fairly well-known principles within the literature in order to make practical a system of pricing that can be utilized
tit is recognizedthat France and Britainare not perfect analogies because marginalcost pricingfor regulatedprivate firmsin the U.S. are constrained by a "fair" rate of return on an historicalrate base. This proposal focuses on a constrainedpeak-loadpricing schedule, which may be a more practicalalternativein mixedsolar energyand conventional energy service areas.
by commercial and residential consumers given the existence of viable solar energy designs as possible energy alternatives. Presently within the U.S. many utilities are reflecting peak-load demand charges in one form or another for large consumers. For example, in the Consolidated Edison electric utility supplying New York City, a "demand charge" is added to the electric bills of large consumers. It is a charge which occurs every month on the peak kilowatt load of demand during that month. A surcharge over and above the demand charge is added for each kilowatt of usage which occurs at peak-loading conditions. Limited application of peak-load pricing in cases where metering costs are not prohibitive, as in the case of large customers, seems to point toward the greater efficiency and equitable treatment of consumers within a utility's service area. If solar energy systems are to be introduced on any significant scale in any region or sector of the economy, the problem of efficient and equitable pricing of electricity and gas supply to solar energy consumers becomes even more salient. Given that present utility pricing policy in the residential and commercial sectors does not account for peak-load differential consumption, any consumers with solar energy facilities that contribute little to the peak-load would be victims of intensive price discrimination. This discrimination is evident when such a consumer pays a price equivalent to average users rather than the lower marginal cost accrued by the utility through that consumer's more favorable consumption schedule. The solar energy user in this way is actually penalized for having such facilities. This will inevitably lead to a disincentive to install solar energy construction. However, the present state of the art of building with solar energy construction warrants, more likely than not, the utilization of electricity at peak-load intervals. In fact, such systems usually exacerbate the peaking problem with the subsequent perverse effects upon the rate schedule. The need for properly synthesizing solar energy systems with utility load curves has been recognized by the utility industry and is manifested through their recent participation as sponsors on solar projects. Pennsylvania Power & Light took the initiative and sponsored an energy conservation demonstration house which uses solar energy to assist a heat pump. The house was just completed in Schnecksville, Penna. Other participants included Franklin Institute and Drexel University. "Solar I" at the Institute of Energy Conversion at the University of Delaware was sponsored in part by the local utility, Delmarva. The recently completed house by Phoenix of Colorado, Inc., in Colorado Springs was also co-sponsored by a local utility. The Public Service Company of New Hampshire has agreed to participate in the construction and evaluation of a proposed house to be built on the campus of New England College in Henniker, being designed by Douglas Wilke. An NSF grant to the City of Santa Clara, California will help to make possible the first city-owned and operated solar building. The American Public Power Association is contributing because, according to General Manager Alex Radin, "The system will provide both a prototype and an
Financialincentivesfor the adoptionof solarenergydesign incentive for other locally owned and operated utilities that are interested in using solar energy to improve system efficiency". One way of solving this problem might be to define the solar energy systems with storage facilities such that enough energy would be available for peak periods where these periods coincide with lack of sunshine. However, if the consumer is going to install such facilities at extra cost, he should have the financial incentives to do so by having reduced electricity rates reflecting his consumption load shifts. Thus, the financial incentive for installation of the solar energy construction would remain in the accountability of the utility load curve changes. Even without consideration of the accentuation of the peak-load problems by the prospect of fairly large scale introduction of solar energy facilities, Turvey[8] has stated that: "The theoretical "solutions" to the peak-load problem are a beginning, not an end, serving to dispose of past confusion about the principles of allocating cost. While the matters which then have to be examined are less suited to the tools of the armchair economist, they are both important and fascinating". According to Davidson[3]: " . . . theoretically a time of day rate schedule is the type of schedule which gives the closest correspondence between costs of service and rates . . . . If suitable, relatively inexpensive, meters were available to register consumption according to the time of use, this type of meter would be proposed for gas utilities. The complete schedule would consist of a fixed monthly service charge plus a rate equal to long-run marginal peak cost during peak hours and a lower rate for off-peak hours equal to long-run marginal off-peak costs... A time of day rate schedule would tend to depress the peak consumption and to encourage consumption during the off-peak hours of the day". The ongoing British experiments in residential electricity have indicated that losses in consumers' surplus were sustained under time-of-day metering. However, the principal reason for costs exceeding benefits is that the meters were too expensive in relation to the consumer's electricity bill. This may not have been the case if less expensive meters were available and solar energy consumers were to be assessed as possible beneficiaries. Recently, the Wisconsin Public Service Commission has ordered the Madison Gas and Electric Company to implement a peak-load pricing schedule for large consumers and investigate the merits of such pricing for small users [9]. All of the above testimony and action on peak-load pricing has been performed without the consideration of the solar energy alternative and the potential ramifications of that alternative. An exemplary combination of solar energy construction and a peak-load pricing system can be seen in the use of a responsive pricing system. Vickrey[10] has proposed responsive pricing systems for various sectors of the economy. He has, in more than several instances, pointed out the advantages of a responsive schedule. Adapting his analysis to make it directly applicable to this analysis
341
would be a convenient method of approach. The following is such an analysis. While situations vary in the degree to which customers can be informed of and react to changes in rates that would reflect fine structural changes in marginal cost that occur during peak hours, there are many cases in which such changes can be reported at relatively low cost to consumers at the time they make their effective decisions. This can be performed in such a way as to make possible a significant increase in the efficiency of utilization and consequently a lower average level of rates. Electricity supply and gas supply are technologically particularly well adapted to such a rate variation. A demand metering principle based upon plant capacity adjustment factors could efficiently keep track of current loads placed upon the system. The variation in rate schedules applicable to a customer could be made to reflect the current short-run marginal costs, which in this case is largely measured by the extent to which the turning on an additional electrical appliance by a given subscriber would increase the probability that the attempt to activate an appliance by some other subscriber would be partially frustrated by decreases in voltage, as well as available gas, and consequently, poorer quality of service. The reduction in service quality can be reflected by marginal opportunity cost pricing. The use of a remote register in the subscriber's home allows him to adjust the usage of electricity according to the rate level quoted. The use of such charging bases with a peak-mitigating system of solar energy heating, cooling and storage, makes it less necessary to provide excess capacity to insure adequate levels of service during periods of peak demand. The rate variation would have the effect of leveling off peaks of demand, and to a lesser extent, of filling in troughs of demand, resulting in higher utilization ratios and lower average rate levels. Such a rate variation scheme would be more significant in flattening peaks than in filling troughs, since some of the latter effect could be achieved fairly readily by regularly scheduled rate reductions. Using electrically-circuited demand meters (operating on the basis of regular time of peak usage rather than the actual time of peak or secondary peak usage) has the danger that it actually promotes an attempt to fill in the troughs too completely and thusly creating new peaks that will maintain unsatisfactory service conditions by not notifying the consumer of the actual state of the generating and distribution system adequately. Excessive attempts at intra-day scheduled rate reductions to shift peaks may also have the same effect. The proposed demand meter, operating on a cents per kilowatt hour for any given period, or some relative scale reflecting similar proportions and appealing to consumer psychology, has a remote register telling the consumer of prospective prices before he is about to use an appliance. Such pricing should fill in troughs and not create new peaks if available energy sources are present. The variations of rates as reflected by demand meters in response to current energy demands is particularly important as a means of preserving adequate pressure and voltage standards in periods of emergency. The consumer will automatically be made aware before usage by the
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STEPHEN L. FELDMANand BRUCE ANDERSON
remote reading register of any such emergency and will adjust his usage accordingly, and will use what would be a less costly solar energy construction alternative. Figure 1 shows how the primary efforts of a peak-load pricing schedule can affect the heating and cooling portion of the demands on the utility companies. The solid line represents the present situation and shows that portion of the demand on the utilities which is heating (top graph) and cooling (bottom graph). The curves are approximations and only represent actual conditions. Forty-eight continuous hours are shown in which the first day is sunny and the second day is cloudy. Constant average temperatures are assumed throughout the 48-hr period but it is also assumed that nights are colder than days. The dashed lines show in the upper diagram the effect of most solar energy space conditioning systems on this base load. They reduce winter heating peaks on days when the sun shines (and for extended periods afterwards depending on the size and design of the system and on the weather conditions). They have almost no effect on some winter peaks which often occur during the coldest weather periods when no sun has shone for several days and there is no solar heat remaining in storage. During the summer cooling cycle, peak loads in many parts of the country occur when the sun is shining most brightly and there is the greatest potential for collecting and utilizing solar energy. Its use at these times can significantly affect peak loads. (In other parts of the country, such as the south-east, peak conditions can occur during hazy days due to the high wet bulb temperature. Under these conditions, solar energy collection is less efficient and may not be able to be obtained in sufficient quantities and at high enough temperatures to actuate absorption--or Rankine-type cooling equipment. Solar energy in such cases would have almost no effect on peak >~
E8 ~1
Winter
- ............
--_J Present situation . . . . Effect of most present solar energy systems
...... Desired effect proposed - - - Idealized gool (no peoks)
~'1 Summer ~81 ~) (fun)
3 =
\ Night Night(no sun) ~,t..~--'~'~'~.~.'~.~-~E,-,~~ (no sun)
,'>-""
"-.
/
loads. (Dessicant-drying systems using solar energy can be viable alternatives.) The dashed and dotted lines below the horizontal axis show the contribution of the solar energy system to the total demand of the building. The sum of the dashed component above the line (furnished by the public utility) and the dashed component below the line (furnished by solar energy) add up to the total demand of the building shown by the solid line above the horizontal. The results most likely to arise from peak-load pricing are shown by the dotted lines. For both heating and cooling, the solar energy system has decreased peak loads, whether the sun is shining or not. For the cases shown here, the aolar system is saving the same amount of overall energy (i.e. its contribution is about the same in both cases) but its use is spread out over a large period of time. Ideally, peak-load pricing would produce the results shown by the dot-dash curve which levels the load on the utility to a fairly constant one. This assumes that other energy demands on the utility are also fairly constant so that the total load on the utility is also constant. Actually, of course, non-space conditioning demands are not uniform over time. Efforts should be made to achieve a near constant demand on the utility by designing the space conditioning systems to operate at periods of times when the other demands are low. RECOMMENDATIONS
The "inefficiencies" of present pricing practice should be determined for consumers with solar energy and those consumers only with conventional gas and electricity systems. Present pricing practice, as pointed out above, does not account for differential peak and off peak consumption except in some cases of large users of electricity or gas. The purpose of a recommended study is to determine the differences in the marginal cost (short and long-run) of peak and off peak supply for gas and electricity. Because of their respective load factors the focus of such a study is on the residential and commercial sectors; the allocation of costs to these two sectors should be made. Therefore, by necessity, all sectors of the utility's service area, inclusive of farm, industrial, and street lighting, should be examined in order to partial out those costs of the residential and commercial sectors. The cost allocation criteria may be similar to that used by the French in the derivation of the "Tariff Verde". Differences in supply costs for generation, transmission and distribution for peak and off peak periods should be ascertained. Transmission losses should be estimated as they are a function of the total load factor. The constraints of "fair" rate of return to the utility will be honored in cost computations. The work of DeSalvia [11] provides an empirical case in point where peak, full use and off peak costs (prices) were estimated. DeSalvia's study will provide one benchmark for cost allocation procedures. The study of Feldman and Gonen [12] shows that spatial aspects of utility cost structures can also be integrated into the prospective pricing scheme. The consequent cost
Financial incentivesfor the adoption of solar energy design allocation should be the basis for a number proposed pricing schemes and temporally variant rate schedules. The rate schedules may not reflect true marginal production costs, but can be based on estimates of the relative production costs of peak and off peak supply. This is understandable given that meeting marginal conditions in a decreasing cost industry will not result in a Pareto optimal solution. The extent to which welfare judgements and how they affect such sector must be made specific in each particular pricing mode. Some exemplary pricing schemes that can be investigated are: 1. A time of day tariff based on a two rate schedule (day and evening-night). 2. A seasonal time-of-day tariff with a peak hour winter (Northern U.S.) or summer (Southern U.S.) week day prices. 3. A responsive rate schedule based on a three-step schedule reflecting peak hour, maximum day and seasonal rates. 4. A non-metered seasonal tariff. Meters should be designed to incorporate the specifications of the peak load pricing schemes to be employed. As was pointed out above, one of the reasons a peak load pricing scheme for the residential sector has not been implemented is due to prohibitive metering costs. However, solutions to the metering problem--at least in terms of low cost--easy billing devices---are already appearing (e.g. [13]). Feldman [14] has patented a demand meter for fluid flow where the meter includes a quantity meter, pressure measuring device and a register. The outputs of the pressure measuring device and quantity meter are correlated to provide a numerical readout at the register inversely proportional to the pressure of the fluid in the fluid lines and directly proportional to the quantity of flow whereby demand on the fluid system is reflected in the quantity readout. Feldman [15] in another patent compensates for "packing" gas distribution lines through a solenoidal addition to the device. Feldman and Graves[16] disclose a variable rate electric metering system with 3 or more speeds respondent to remote interrogation through a multi-tone control code reflective
343
of overall system demand. A consumer display unit is also embodied. Feldman has extended the concept of metering fluid flow a more recent set of embodiments that are not yet disclosed but patent pending. It is felt that if implementation of a peak load pricing schedule for solar energy consumers is to be feasible, reference to the adaptation of existing patents or new design needs to be performed.
REFERENCES
1. P. O. Steiner, Peak loads and efficient pricing. Quarterly Journal of Economics 71, 584--568(1957). 2. J. Nelson (ed.), Marginal Cost Pricing in Practice, pp. 59-89. Prentice-Hall, Englewood Cliffs, New Jersey (1964). 3. R. K. Davidson, Price Discrimination in the Selling of Gas and Electricity. Johns Hopkins University, Baltimore, Maryland (1955). 4. E. Clemens, Marginal cost pricing: a comparison of French and Americanpower rates. Land Economics 40, 185 (1964). 5. R. Turvey, Optimal Pricing and Investment in Electricity Supply: An Essay in Applied Welfare Economics. Allen & Unwin, London (1968). 6. O. Williamson,Peak-load pricing and optimal capacity under indivisibility constraints. American Economic Review 56, 810-827 (1966). 7. J. Hirschleifer, Peak loads and efficient pricing: comment, Quarterly Journal of Economics 72, 451-461 (1958). 8. R. Turvey, Peak-load pricing. Journal of Political Economy 76, 101 (1968). 9. A "giant step" in power pricing, Science 185, 1031 (1974). 10. W. Vickrey, Responsive pricing. Bell Journal of Economics and Management Science 2, 334-337 (1971). I 1. D. N. DeSalvia, An application of peak load pricing. Journal of Business 45, 458 (1969). 12. S. Feldman and A. Gonen, The spatio-temporal pricing of some urban public services: urban ecology, equity and efficiency. Research Report No. 2, Institute of Urban and Regional Studies, The Hebrew University of Jerusalem (1973). 13. S. Feldman, Fluid demand metering system. U.S. Pat. Pending, Serial No. 461,921. 14. S. Feldman, A pressure demand meter for fluid flow measurement. U.S. Pat. 3,653,261 (1972). 15. S. Feldman, A pressure demand meter for fluid flow measurement. U.S. Pat. 3,675,480(1972). 16. S. Feldman and W. Graves, Demand metering system for electric energy. U.S. Pat. 3,683,343 (1972).
FINANCIAL INCENTIVES FOR THE ADOPTION OF SOLAR ENERGY DESIGN: PEAK-LOAD PRICING OF BACK-UP SYSTEMS STEPHEN L. FELDMAN Assistant Professor, Graduate Schoolof Geography,Clark University, Worcester, MA 01610, U.S.A. and BRUCE ANDERSON Director, Total EnvironmentalAction, Harfisville,NH 03450,U.S.A. (Received 3 April 1975) Abstract--Most solar energy systems for the space conditioningof buildingsrequire a full sized back-up system for long periods of cloudy weather. If gas or electricity is a source of energy for that back-up system, not only does the buildingowner have to provide both a solar energy system and a back-up system, but the utility company has to build and maintain full sized facilities to provide for the demand by the back-up system during peak load conditions. One method to limit capacity design of utilities is to design a peak-loadpricing scheme which would tend to flatten the utilities' load curve. The scheme could also provide incentives for the installation of solar energy design that would use electricity or gas as back-up systems during off-Peak hours only. Indeed, the success of the diffusion of solar energy construction into widespread usage may depend upon such financial incentives to the consumer.
INTRODUCTION
Heavy demands are being placed upon resources which are requisite in the supply of energy to all sectors of the economy. In particular, due to exacerbating environmental costs, gas and electric utilities are hard pressed for fuels and supply capacity. Given the vast array of contractual and market arrangements in the supply of energy in the economy, economic and engineering examinations of only one set of energy technologies violate the most fundamental concepts relating to the efficiency of the energy supply system in its relation to the total economy. Also, since the shortages of energy generation and delivery capacity and fuels can be viewed as a problem in the disequilibrium of supply and demand parameters, attention to only the supply side of the market ignores the full potential for proper adjustments. The intent of this analysis is to examine the demand and supply of solar energy as an alternative technology juxtaposed against the demand and supply characteristics of electricity and natural gas. More specifically, solar energy technology will be reviewed to account for possible tradeoffs in the use of that technology with the usage of electricity and natural gas as stand-by or back-up systems at off-peak periods only. Studies have been made recommending the investigation and use of solar energy systems in building for space heating and cooling and for domestic hot water heating. The considerations of such systems for different geographic areas and economic sectors has been well explored. These studies, however, have generally been lax in not accounting for the impact of such systems upon the load curve of electric and gas utilities when the latter must be used as back-up forms of energy. Thus far, designs for systems using natural forms of energy are hampered by their usual inability to reduce peak demand on the
utilities. Therefore, the design of solar energy systems should account for the effects upon the utilities' load curve and subsequent alterations in their rate and financial structures. Most solar systems are designed in conjunction with fullsized back-up systems for use in periods of insufficient solar energy. If the back-up system uses gas or electricity as its energy source, the utility company's capacity must be sufficient in size to provide energy for the full heating and/or cooling demand of the building during the peak periods. The combined capacity dimensions for both the back-up system and the solar energy construction has inherent diseconomies for various accounts: 1. For building owners. The initial cost of providing heating and/or cooling systems is greatly compounded by the need to build two full-sized systems instead of the single conventional system. Neither of these two systems is used to the extent that the single conventional system would have been used. 2. For utility companies. The high capital and operating cost of equipment requires that the load factors on that equipment be as high as possible. Solar energy systems are usually designed to place occasional full-design loads of buildings on the utilities; peak weather conditions usually coincide with peak loading conditions. Thus, the building owner has to provide two full-sized systems, and the utility company has to provide another. As the use of solar energy increases, the utility companies will recognize this burden and will be forced to impose penalizing rates on solar energy users just as they have on "total energy systems". Such rates could almost surely inhibit the use of solar energy. 3. For the U.S. Natural resources and capital markets are strained in the U.S. by pressing societal needs. Building costs are now so high that added costs of two 339
SE Vol. 17, No. 6--B
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STEPHEN L. FELDMAN and BRUCE ANDERSON
simultaneous space conditioning systems would even further constrict the already lagging construction industry. Economic and environmental constraints have all but stopped expansion of electric power facilities. In the U.S., the inhibition of energy supply expansion has far-reaching economic effects; solar energy can provide a major input into economic expansion. Obviously, the consideration of solar energy must be accompanied by a commensurate consideration of the power industry. There are short-run and long-run implications of solar heating and cooling as affectors of a utility's load curve. For example, consider the diurnal load curve for residential consumption. This curve shows an evening peak which would likely be affected in magnitude and/or duration by solar energy heating depending on sunshine conditions and solar heat storage capacity. This effect would save the utility considerable fuel costs in foregoing the extended use of its peaking capacity and save long-run costs associated with capacity design. However, the present metering and billing system does not allow the utility to compose a rate structure to pass on these savings to solar energy users. Since peak-load facilities are salient from the short and long-run perspectives, any design of solar construction should accommodate itself to the substitution of the utility's higher cost facilities. Generally, present solar energy technology for buildings have not been assessed with regard to making this substitution, nor have they been designed specifically for this purpose in the past. PEAK.LOAD PRICING OF STAND-BYSYSTEMS
The problem of peak-load pricing in economics is not without a large audience of theoreticians. Literally dozens of models of pricing policy have been formulated in the past two decades (e.g. [1-7]). After 5yr of intensive research, the French developed a rather sophisticated system of pricing for its industrial sector resulting in large saving in fuel and electricity capacity. The British are presently experimenting with a peak-load pricing using expensive metering devices in the residential sector for electricity.t While gas and electricity have essentially different supply conditions (storable versus non-storable), they are both part of the hierarchial and attentuated distribution systems characterized as being subject to peak-load criteria for capacity design. In this study, gas and electricity are two energy sources that will be considered as likely candidates for solar energy back-up systems. The purpose of this paper is not to derive another theoretical solution to the peak-load pricing policy since solar energy construction does not nullify the extent to which the present literature is valid. It is to simply apply fairly well-known principles within the literature in order to make practical a system of pricing that can be utilized
tit is recognizedthat France and Britainare not perfect analogies because marginalcost pricingfor regulatedprivate firmsin the U.S. are constrained by a "fair" rate of return on an historicalrate base. This proposal focuses on a constrainedpeak-loadpricing schedule, which may be a more practicalalternativein mixedsolar energyand conventional energy service areas.
by commercial and residential consumers given the existence of viable solar energy designs as possible energy alternatives. Presently within the U.S. many utilities are reflecting peak-load demand charges in one form or another for large consumers. For example, in the Consolidated Edison electric utility supplying New York City, a "demand charge" is added to the electric bills of large consumers. It is a charge which occurs every month on the peak kilowatt load of demand during that month. A surcharge over and above the demand charge is added for each kilowatt of usage which occurs at peak-loading conditions. Limited application of peak-load pricing in cases where metering costs are not prohibitive, as in the case of large customers, seems to point toward the greater efficiency and equitable treatment of consumers within a utility's service area. If solar energy systems are to be introduced on any significant scale in any region or sector of the economy, the problem of efficient and equitable pricing of electricity and gas supply to solar energy consumers becomes even more salient. Given that present utility pricing policy in the residential and commercial sectors does not account for peak-load differential consumption, any consumers with solar energy facilities that contribute little to the peak-load would be victims of intensive price discrimination. This discrimination is evident when such a consumer pays a price equivalent to average users rather than the lower marginal cost accrued by the utility through that consumer's more favorable consumption schedule. The solar energy user in this way is actually penalized for having such facilities. This will inevitably lead to a disincentive to install solar energy construction. However, the present state of the art of building with solar energy construction warrants, more likely than not, the utilization of electricity at peak-load intervals. In fact, such systems usually exacerbate the peaking problem with the subsequent perverse effects upon the rate schedule. The need for properly synthesizing solar energy systems with utility load curves has been recognized by the utility industry and is manifested through their recent participation as sponsors on solar projects. Pennsylvania Power & Light took the initiative and sponsored an energy conservation demonstration house which uses solar energy to assist a heat pump. The house was just completed in Schnecksville, Penna. Other participants included Franklin Institute and Drexel University. "Solar I" at the Institute of Energy Conversion at the University of Delaware was sponsored in part by the local utility, Delmarva. The recently completed house by Phoenix of Colorado, Inc., in Colorado Springs was also co-sponsored by a local utility. The Public Service Company of New Hampshire has agreed to participate in the construction and evaluation of a proposed house to be built on the campus of New England College in Henniker, being designed by Douglas Wilke. An NSF grant to the City of Santa Clara, California will help to make possible the first city-owned and operated solar building. The American Public Power Association is contributing because, according to General Manager Alex Radin, "The system will provide both a prototype and an
Financialincentivesfor the adoptionof solarenergydesign incentive for other locally owned and operated utilities that are interested in using solar energy to improve system efficiency". One way of solving this problem might be to define the solar energy systems with storage facilities such that enough energy would be available for peak periods where these periods coincide with lack of sunshine. However, if the consumer is going to install such facilities at extra cost, he should have the financial incentives to do so by having reduced electricity rates reflecting his consumption load shifts. Thus, the financial incentive for installation of the solar energy construction would remain in the accountability of the utility load curve changes. Even without consideration of the accentuation of the peak-load problems by the prospect of fairly large scale introduction of solar energy facilities, Turvey[8] has stated that: "The theoretical "solutions" to the peak-load problem are a beginning, not an end, serving to dispose of past confusion about the principles of allocating cost. While the matters which then have to be examined are less suited to the tools of the armchair economist, they are both important and fascinating". According to Davidson[3]: " . . . theoretically a time of day rate schedule is the type of schedule which gives the closest correspondence between costs of service and rates . . . . If suitable, relatively inexpensive, meters were available to register consumption according to the time of use, this type of meter would be proposed for gas utilities. The complete schedule would consist of a fixed monthly service charge plus a rate equal to long-run marginal peak cost during peak hours and a lower rate for off-peak hours equal to long-run marginal off-peak costs... A time of day rate schedule would tend to depress the peak consumption and to encourage consumption during the off-peak hours of the day". The ongoing British experiments in residential electricity have indicated that losses in consumers' surplus were sustained under time-of-day metering. However, the principal reason for costs exceeding benefits is that the meters were too expensive in relation to the consumer's electricity bill. This may not have been the case if less expensive meters were available and solar energy consumers were to be assessed as possible beneficiaries. Recently, the Wisconsin Public Service Commission has ordered the Madison Gas and Electric Company to implement a peak-load pricing schedule for large consumers and investigate the merits of such pricing for small users [9]. All of the above testimony and action on peak-load pricing has been performed without the consideration of the solar energy alternative and the potential ramifications of that alternative. An exemplary combination of solar energy construction and a peak-load pricing system can be seen in the use of a responsive pricing system. Vickrey[10] has proposed responsive pricing systems for various sectors of the economy. He has, in more than several instances, pointed out the advantages of a responsive schedule. Adapting his analysis to make it directly applicable to this analysis
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would be a convenient method of approach. The following is such an analysis. While situations vary in the degree to which customers can be informed of and react to changes in rates that would reflect fine structural changes in marginal cost that occur during peak hours, there are many cases in which such changes can be reported at relatively low cost to consumers at the time they make their effective decisions. This can be performed in such a way as to make possible a significant increase in the efficiency of utilization and consequently a lower average level of rates. Electricity supply and gas supply are technologically particularly well adapted to such a rate variation. A demand metering principle based upon plant capacity adjustment factors could efficiently keep track of current loads placed upon the system. The variation in rate schedules applicable to a customer could be made to reflect the current short-run marginal costs, which in this case is largely measured by the extent to which the turning on an additional electrical appliance by a given subscriber would increase the probability that the attempt to activate an appliance by some other subscriber would be partially frustrated by decreases in voltage, as well as available gas, and consequently, poorer quality of service. The reduction in service quality can be reflected by marginal opportunity cost pricing. The use of a remote register in the subscriber's home allows him to adjust the usage of electricity according to the rate level quoted. The use of such charging bases with a peak-mitigating system of solar energy heating, cooling and storage, makes it less necessary to provide excess capacity to insure adequate levels of service during periods of peak demand. The rate variation would have the effect of leveling off peaks of demand, and to a lesser extent, of filling in troughs of demand, resulting in higher utilization ratios and lower average rate levels. Such a rate variation scheme would be more significant in flattening peaks than in filling troughs, since some of the latter effect could be achieved fairly readily by regularly scheduled rate reductions. Using electrically-circuited demand meters (operating on the basis of regular time of peak usage rather than the actual time of peak or secondary peak usage) has the danger that it actually promotes an attempt to fill in the troughs too completely and thusly creating new peaks that will maintain unsatisfactory service conditions by not notifying the consumer of the actual state of the generating and distribution system adequately. Excessive attempts at intra-day scheduled rate reductions to shift peaks may also have the same effect. The proposed demand meter, operating on a cents per kilowatt hour for any given period, or some relative scale reflecting similar proportions and appealing to consumer psychology, has a remote register telling the consumer of prospective prices before he is about to use an appliance. Such pricing should fill in troughs and not create new peaks if available energy sources are present. The variations of rates as reflected by demand meters in response to current energy demands is particularly important as a means of preserving adequate pressure and voltage standards in periods of emergency. The consumer will automatically be made aware before usage by the
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STEPHEN L. FELDMANand BRUCE ANDERSON
remote reading register of any such emergency and will adjust his usage accordingly, and will use what would be a less costly solar energy construction alternative. Figure 1 shows how the primary efforts of a peak-load pricing schedule can affect the heating and cooling portion of the demands on the utility companies. The solid line represents the present situation and shows that portion of the demand on the utilities which is heating (top graph) and cooling (bottom graph). The curves are approximations and only represent actual conditions. Forty-eight continuous hours are shown in which the first day is sunny and the second day is cloudy. Constant average temperatures are assumed throughout the 48-hr period but it is also assumed that nights are colder than days. The dashed lines show in the upper diagram the effect of most solar energy space conditioning systems on this base load. They reduce winter heating peaks on days when the sun shines (and for extended periods afterwards depending on the size and design of the system and on the weather conditions). They have almost no effect on some winter peaks which often occur during the coldest weather periods when no sun has shone for several days and there is no solar heat remaining in storage. During the summer cooling cycle, peak loads in many parts of the country occur when the sun is shining most brightly and there is the greatest potential for collecting and utilizing solar energy. Its use at these times can significantly affect peak loads. (In other parts of the country, such as the south-east, peak conditions can occur during hazy days due to the high wet bulb temperature. Under these conditions, solar energy collection is less efficient and may not be able to be obtained in sufficient quantities and at high enough temperatures to actuate absorption--or Rankine-type cooling equipment. Solar energy in such cases would have almost no effect on peak >~
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- ............
--_J Present situation . . . . Effect of most present solar energy systems
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loads. (Dessicant-drying systems using solar energy can be viable alternatives.) The dashed and dotted lines below the horizontal axis show the contribution of the solar energy system to the total demand of the building. The sum of the dashed component above the line (furnished by the public utility) and the dashed component below the line (furnished by solar energy) add up to the total demand of the building shown by the solid line above the horizontal. The results most likely to arise from peak-load pricing are shown by the dotted lines. For both heating and cooling, the solar energy system has decreased peak loads, whether the sun is shining or not. For the cases shown here, the aolar system is saving the same amount of overall energy (i.e. its contribution is about the same in both cases) but its use is spread out over a large period of time. Ideally, peak-load pricing would produce the results shown by the dot-dash curve which levels the load on the utility to a fairly constant one. This assumes that other energy demands on the utility are also fairly constant so that the total load on the utility is also constant. Actually, of course, non-space conditioning demands are not uniform over time. Efforts should be made to achieve a near constant demand on the utility by designing the space conditioning systems to operate at periods of times when the other demands are low. RECOMMENDATIONS
The "inefficiencies" of present pricing practice should be determined for consumers with solar energy and those consumers only with conventional gas and electricity systems. Present pricing practice, as pointed out above, does not account for differential peak and off peak consumption except in some cases of large users of electricity or gas. The purpose of a recommended study is to determine the differences in the marginal cost (short and long-run) of peak and off peak supply for gas and electricity. Because of their respective load factors the focus of such a study is on the residential and commercial sectors; the allocation of costs to these two sectors should be made. Therefore, by necessity, all sectors of the utility's service area, inclusive of farm, industrial, and street lighting, should be examined in order to partial out those costs of the residential and commercial sectors. The cost allocation criteria may be similar to that used by the French in the derivation of the "Tariff Verde". Differences in supply costs for generation, transmission and distribution for peak and off peak periods should be ascertained. Transmission losses should be estimated as they are a function of the total load factor. The constraints of "fair" rate of return to the utility will be honored in cost computations. The work of DeSalvia [11] provides an empirical case in point where peak, full use and off peak costs (prices) were estimated. DeSalvia's study will provide one benchmark for cost allocation procedures. The study of Feldman and Gonen [12] shows that spatial aspects of utility cost structures can also be integrated into the prospective pricing scheme. The consequent cost
Financial incentivesfor the adoption of solar energy design allocation should be the basis for a number proposed pricing schemes and temporally variant rate schedules. The rate schedules may not reflect true marginal production costs, but can be based on estimates of the relative production costs of peak and off peak supply. This is understandable given that meeting marginal conditions in a decreasing cost industry will not result in a Pareto optimal solution. The extent to which welfare judgements and how they affect such sector must be made specific in each particular pricing mode. Some exemplary pricing schemes that can be investigated are: 1. A time of day tariff based on a two rate schedule (day and evening-night). 2. A seasonal time-of-day tariff with a peak hour winter (Northern U.S.) or summer (Southern U.S.) week day prices. 3. A responsive rate schedule based on a three-step schedule reflecting peak hour, maximum day and seasonal rates. 4. A non-metered seasonal tariff. Meters should be designed to incorporate the specifications of the peak load pricing schemes to be employed. As was pointed out above, one of the reasons a peak load pricing scheme for the residential sector has not been implemented is due to prohibitive metering costs. However, solutions to the metering problem--at least in terms of low cost--easy billing devices---are already appearing (e.g. [13]). Feldman [14] has patented a demand meter for fluid flow where the meter includes a quantity meter, pressure measuring device and a register. The outputs of the pressure measuring device and quantity meter are correlated to provide a numerical readout at the register inversely proportional to the pressure of the fluid in the fluid lines and directly proportional to the quantity of flow whereby demand on the fluid system is reflected in the quantity readout. Feldman [15] in another patent compensates for "packing" gas distribution lines through a solenoidal addition to the device. Feldman and Graves[16] disclose a variable rate electric metering system with 3 or more speeds respondent to remote interrogation through a multi-tone control code reflective
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of overall system demand. A consumer display unit is also embodied. Feldman has extended the concept of metering fluid flow a more recent set of embodiments that are not yet disclosed but patent pending. It is felt that if implementation of a peak load pricing schedule for solar energy consumers is to be feasible, reference to the adaptation of existing patents or new design needs to be performed.
REFERENCES
1. P. O. Steiner, Peak loads and efficient pricing. Quarterly Journal of Economics 71, 584--568(1957). 2. J. Nelson (ed.), Marginal Cost Pricing in Practice, pp. 59-89. Prentice-Hall, Englewood Cliffs, New Jersey (1964). 3. R. K. Davidson, Price Discrimination in the Selling of Gas and Electricity. Johns Hopkins University, Baltimore, Maryland (1955). 4. E. Clemens, Marginal cost pricing: a comparison of French and Americanpower rates. Land Economics 40, 185 (1964). 5. R. Turvey, Optimal Pricing and Investment in Electricity Supply: An Essay in Applied Welfare Economics. Allen & Unwin, London (1968). 6. O. Williamson,Peak-load pricing and optimal capacity under indivisibility constraints. American Economic Review 56, 810-827 (1966). 7. J. Hirschleifer, Peak loads and efficient pricing: comment, Quarterly Journal of Economics 72, 451-461 (1958). 8. R. Turvey, Peak-load pricing. Journal of Political Economy 76, 101 (1968). 9. A "giant step" in power pricing, Science 185, 1031 (1974). 10. W. Vickrey, Responsive pricing. Bell Journal of Economics and Management Science 2, 334-337 (1971). I 1. D. N. DeSalvia, An application of peak load pricing. Journal of Business 45, 458 (1969). 12. S. Feldman and A. Gonen, The spatio-temporal pricing of some urban public services: urban ecology, equity and efficiency. Research Report No. 2, Institute of Urban and Regional Studies, The Hebrew University of Jerusalem (1973). 13. S. Feldman, Fluid demand metering system. U.S. Pat. Pending, Serial No. 461,921. 14. S. Feldman, A pressure demand meter for fluid flow measurement. U.S. Pat. 3,653,261 (1972). 15. S. Feldman, A pressure demand meter for fluid flow measurement. U.S. Pat. 3,675,480(1972). 16. S. Feldman and W. Graves, Demand metering system for electric energy. U.S. Pat. 3,683,343 (1972).