There is a problem with the way many capital intensive and near monopoly goods, such as energy and water, are priced in our economy. The problem arises when society decides, or needs, to reduce consumption of these goods. Clearly this is happening now in the face of climate change and major regional drought. The problem, put simply, is that the ratio of fixed costs to variable costs is weighed heavily in favour of fixed costs so as demand goes down the supplier is faced with fixed costs being an even greater percentage of total costs, resulting, in a classical situation, in an increasing price for the commodity.
For example, the cost of the infrastructure required for supply of electricity is much greater than the costs of the water, fuel, renewable resources, or uranium required to generate the electricity. In some cases demand for electricity goes down by so much that generation and production equipment is idled before it has reached the end of its productive and/or economic life. This is the classic problem of “stranded assets”. The result is that ratepayers are forced to pay an increased price for less electricity, simply to continue paying off the debt that the electricity company took on to build the infrastructure in the first place.
This is pretty much a lose-lose situation for electricity companies and consumers. If society is to enthusiastically embrace conservation we are going to have to find ways to avoid having prices per unit of energy increase as demand decreases.
Energy service companies have developed a model that may well be appropriate for energy supply and local distribution companies. The model recognizes that they do not really care how many electrons (kilowatt-hours) they receive but simply want to receive the benefits, in the form of lighting, heating, motion, etc., that the electrons provide. Instead of paying for electricity, users are charged for the services provided. The services include the electricity, supply, maintenance, consumables and their replacement, and so on. Thus a consumer might contract for 900 lumens of light in a room. The ESCO would install the light, provide wiring and fittings as necessary, maintain the fixture, and replace the light bulb periodically. The same model would be even more relevant and effective when applied to large energy consuming appliances and equipment.
The environmental advantage is that if the ESCO could provide 900 lumens of light with lower electricity consumption there would be an economic incentive for them to do so, even if some additional capital cost, for example the cost of new lightbulbs, is necessary. Maybe the ESCO would even pass some of the savings on to the consumer. If the ESCO is also the utility providing the electricity then planning for demand would be easier and the need for capital investment could be more easily controlled and decisions to keep building more and more supply could be at least partially set aside in favour of more energy efficient solutions.
Imagine if the same approach existed for personal automobiles. You lease your car at a fixed price per year and per kilometre and the fixed price includes all fuel, maintenance, repairs, insurance, and consumables such as tires. You know exactly what you have to pay and, with few exceptions, that price is not going to go up. The leasing company, which may well be the manufacturer, has an incentive to keep your car well maintained so that its costs for fuel and future maintenance are minimized. The approach is not perfect but it does indicate a direction that needs to be taken if conservation and efficiency are to supercede increasing supply as the major drivers of the energy industry.
This is a GallonDaily original editorial. Comments are welcome and may be published at the discretion of the Editor.