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It is tempting, therefore, to call for the extension of the energy market functions -- already enjoyed by medium and large enterprises -- to small businesses and private homes. This competition model managed to reduce energy bills for large users by nearly 50 percent since the 1990s, and a similar move towards the rest of the market could, on the face of it, offer a positive outcome.
However, there is an inherent conflict between energy competition and energy conservation: a meaningful competition will inevitably reduce prices, which will in turn increase the propensity to consume more. This conflict needs to be addressed prior to any reformation of energy markets.
This article reviews the conceptual and practical aspects of widening demand response systems to small users.
The reverse process, where suppliers respond to real-time market conditions by altering prices, is never even considered. Price of energy is determined by stock exchanges based on production alone. Our demand for energy is assumed to be infinite and completely elastic.
Events of the summer 2008 seemed to have reinforced this hypothesis. Prices doubled within months not because the demand suddenly doubled but because the perceived inability of suppliers to provide for existing and long-term forecasted demand. Responding to this change, according to the definition above, should have reduced consumers' demand by half and allowed the market to readjust. In practice however, energy demand and prices collapsed in the autumn due to malpractices of the global financial sector and the inflated prices of U.S. properties.
Having established that oil prices alone did not affect demand during that period, it would be reasonable to assume that demand is unlikely to change now that energy prices coming down. Consumers are not about to overheat their homes or workplaces, drive or fly farther or operate their air-conditioning or machinery for longer.
A different scenario is difficult to sketch under the current market structure, but it is tempting to hypothesize a demand response where consumers respond to demand rather than forecast production.
One of the reasons demand for energy is not reflected in its price structure could be argued to be the result of market architecture. When a multitude of micro-units (in this scenario, households) form a substantial part of it, their ability to form a coherent trend is limited. Each unit consumes different energy at different times and in different proportions.
While a large proportion of homes' profiles would probably fit a general pattern, e.g., less demand at night and peaks in the evenings, etc., it is the reiteration of the slight variations between the multitudes that could affect price. A few single kilowatts in a million homes could affect demand. However, these changes remain irrelevant to the overall pricing system because of its inability, so far, to aggregate it and translate it into a coherent meaningful demand structure at a speed that would fit the energy market.
This ability has existed in the commercial sector for nearly 20 years. It does not affect the overall structure of the household energy market -- hence the inexistence of a real-price demand response. Suppliers can compensate their tighter margins on sales to larger users with the generous and uncontrolled yields resulting from their sales to non-responsive home consumers.
In this context, Home Area Networking (HAN) plays a crucial role by using metering technology and communication infrastructure for accurate and timely aggregation. It is the first time that aggregating home users through their HAN becomes a real demand response tool. The ability of local networks to gather micro-information and communicate in real time to energy brokers opens new horizons.
However, such development has its drawbacks. One of the most notable would be the inability of some suppliers to readjust themselves to the changing conditions, or face severe, if not fatal, consequences. Considering that many energy suppliers form some of the largest corporations in any state economy, such instability would have serious consequences on any financial system.
Equally important, however, is the impact of such move on domestic energy consumption. Homes that are able to flex their demand muscles will, as described above, enjoy advantageous tariffs that can lead to increased demand. While commercial users calculate their energy demand as part of their operational cost and try to keep it to the minimum, research suggests that home energy consumption is rarely rationalized: most of us consume energy as much as we want to and when we want it, regardless of its cost.
At a time of growing concern over finite energy resources and the effect of energy usage on climate change, it is difficult to advocate a change towards a system that may have at its core the encouragement of increased home energy consumption. While the savings to domestic budgets at a time of economic crisis may appear a positive relief, the long-term effects of such move are too complex to risk.
The solution must consist of a combination of technology with new operational concepts. One example would be to tie all homes that are billed through their HANs into a voluntary agreement whereby their tariffs would only be traded as long as they maintain a certain consumption level.
Alternatively, the information transmitted through the network should be used adjust tariffs to consumption levels. Government agencies could reward consumers who maintain low demand while allowing "wasteful" users' tariffs to be aggregated with less favorable customers.
The deployment of HAN as a mean of introducing homes to the energy market, therefore, has political implications. The issue would have to be placed at the top of the energy agenda of any government for it to have the will to fight for it, and incoming administrations, such as the one now settling into power in the U.S., are particularly well-positioned to implement such a task.
Such a scheme may prove politically challenging to promote, but beyond its obvious consequences it may also harbour unforeseen economic benefits. The failure of any government to act on it now will come to haunt us all in the future.
