To understand the real value of electricity, consider the price at which people will give it up. “Demand Response” is the nice euphemism for a voluntary blackout. At what point do people volunteer to go without? For most of the market, apparently, it’s more than $7500/MWh.
If I read this graph correctly, look how fast the prices rise, and how small the response is. For example, in South Australia there is only about 10MW available at less than $300/MWh? (From this AEMO report). For reference the total SA demand is around 1500MW. So 10MW is less than 1%.
(See below for the
Consider how few people are willing to turn the electricity off:
AEMO expects there to be approximately 50 MW of demand response in NSW when the price reaches $1,000/MWh.
The total size of the NSW state market is about 10,000MW. Retail electricity sells for $250 — $470MWh (and only $100/MWh in the US). Hence when the price hits two to four times the normal retail cost of electricity, only about 5% of the market say they will willingly stop using it. When the price hits $7500MWh another 2% will give it up. We can’t take this reasoning too far, but the message is clear that the pain of giving up electricity costs a lot more than generating it. Demand is “inelastic”.
Electricity generation creates wealth. People value the product far above the cost of production.
We could raise prices but business locations are “elastic”….
Here’s the text to go with the graph from that report:
Demand response observed to date
A 2016 survey for the AEMC suggested that there is at least 235 MW of demand response capability under contract to retailers, mostly involving exposure to the wholesale market spot price, with more demand response contracted to specialist demand side-management companies.
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