The Changing Role of Electricity Demand

Transforming resource adequacy from a public to a private good could enhance economic efficiency, accelerate decarbonization, and reduce overall energy costs, but it also raises significant equity and implementation concerns. This is what Xiyu Ren (DPhil candidate at the University of Oxford), Iacopo Savelli (postdoctoral researcher in applied economics at the GREEN Centre, Bocconi), and Thomas Morstyn (Department of Engineering Science of the University of Oxford) argue in their article “Making Resource Adequacy a Private Good: The Good, the Bad, and the Ugly” recently published in Joule, a scientific journal dedicated to research on sustainable energy.

The concept of resource adequacy refers to a power system’s capacity to meet electricity demand consistently. Traditionally managed as a public good, resource adequacy ensures that everyone benefits from a stable electricity supply, regardless of individual contributions. This communal approach, while equitable, may lead to inefficiencies and higher costs, as consumers cannot tailor their adequacy payments depending on their preferences.

Iacopo Savelli and his colleagues suggest that with advancements in smart grid technologies and changing public perceptions, it is now feasible to consider resource adequacy as a private good. This shift would mean that consumers should only pay for the actual level of adequacy they want, which could incentivize more efficient energy usage and investments in energy-efficient appliances. “By treating the adequacy of non-essential electricity consumption as a private good, the cost will be allocated to consumers based on their actual preferences, potentially leading to greater savings and a reduction in non-essential consumption,” Savelli says.

However, this approach is not without its challenges. One significant concern is defining and ensuring a socially acceptable level of “essential demand” – the minimum amount of electricity necessary for basic living requirements. The authors note that this definition can vary greatly among different regions and consumer groups, complicating its implementation. Ensuring equitable access to this essential demand is crucial to prevent exacerbating existing inequalities, especially for vulnerable groups such as low-income households and individuals relying on electricity-dependent medical equipment.

Moreover, privacy issues could arise from the increased data collection required to monitor and manage individual electricity consumption. Robust data platforms and privacy-preserving mechanisms would need to be established to protect consumer information. The transition to treating resource adequacy as a private good would also necessitate significant regulatory adjustments and public acceptance, both of which pose substantial hurdles.

Despite these challenges, the authors highlight the potential benefits of this paradigm shift. Treating resource adequacy as a private good could lead to more precise and efficient allocation of resources, aligning costs with individual preferences and encouraging energy-efficient behaviors that support decarbonization efforts. This could significantly contribute to global climate goals by reducing overall energy consumption and promoting cleaner energy practices.

In short, while the transition to making resource adequacy a private good presents several challenges, including defining essential demand and ensuring equitable access, it offers promising benefits in terms of economic efficiency and decarbonization. As Savelli concludes, “Supported by changing perceptions and smart grid technology advances, treating resource adequacy as a private good with reliable access to a socially acceptable level of essential demand has the potential to reduce overall energy bills for customers, improve allocation efficiency, and accelerate the decarbonization of the energy system.”