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Ahhh, Spud’s idea

To move to pricing of energy by type of production. Why is this a bad idea?

Marginal cost pricing is a fundamental economic tenet: price equal to marginal cost gives the right incentives to produce and consume. Below marginal cost pricing (the cost of the most expensive resource sets the price) encourages overconsumption. Further, unless marginal units are compensated there will be underproduction. Both of these create inefficiencies, exacerbate scarcity, and can lead to actual shortages and the necessity of rationing.

On a whiteboard you could draw up a pricing mechanism that perfectly price discriminates by paying each resource its marginal cost. This effectively appropriates all of the producer surplus which can be redistributed to favored political constituencies. But this doesn’t cover fixed costs and a return on capital, which discourages future investment.

Further, classroom whiteboard exercises are usually impossible even to approximate in reality. Knowing what marginal cost is for each resource in a complicated system is a major problem, especially when you take transmission into consideration. The likely outcome would be some sort of kludge with roughly average cost pricing combined with some Rube Goldberg scheme to compensate producers. This whole system would involve massive redistribution and all of the politicking and corruption attendant to it.

That whiteboard thing is exactly what Smurf wants to do of course….

10 thoughts on “Ahhh, Spud’s idea”

  1. On the gripping hand…
    Setting a different market and price for windmill electricity may force the declaration of dispatchability penalties, and start loading the backup costs (batteries made from compressed unicorns I am told) onto the windmill generators.

    So transparency in pricing is good. This price if power is guranteed, with these extreme penalties if you fail to deliver… or this very much lower price for maybe/maybenot power that no one can use without extra costs.

    This initiative may cut away a lot of the green subsidy swamp. Never underestimate the power of politicians to shoot themselves in the foot or head. Shame they keep missing their brains by several feet.

  2. jgh, consumer of baked products

    In my local baked goods supplier, a 800g Wharburton’s seeded batch loaf is now £1.95, a 800g Co-op seeded batch has dropped to £1.05. Why do I not have the same choice between atomic electricity and bird-chopper electricity?

  3. IF they were really fungible, no one would buy Wharburton’s loaf. That they are being bought means you might want to look closer.

    As for the electrons? As far as I understand no electron from the windmill actually gets to you, rather like no water molecule in a wave actually goes anywhere. There seems to be some sort of domino effect.

    My understanding of electricity is likely imperfect, I am not a physicist.

  4. @M
    You are doubly right.

    There is no connection between your appliance and the power station, because of transformers: two separate coils that don’t connect electrically (but do, magnetically).

    And the mains is AC, so the electrons don’t even drift anywhere, but they do shake about a lot. Sort of a 50Hz mexican wave.

    But it’d be great to let people buy solar or windmill electricity, so long as that means they get none at all when its dark and/or calm. Soon see who is really against coal power when the brass monkeys come a’callin’.

  5. The electrons (or rather, the EMF) is fungible, but if (made-up numbers) 5GW of 5p wind-powered electrons have been put into the grid, when somebody has taken that last kW after the 4.999th kW nobody else should be able to to get any elections from the “5p” pool, they should either not be able to obtain a supply of electrons (run outa bread, mate), or if they value having electrons more than not having electrons, they should express their preference and buy from the 15p gas-powered electrons (no £1 Co-op left, I’ve got some £2 Warby’s).

  6. In decoupling utility profits from sales by law, is Washington state setting an above-market price for retail electricity, because otherwise utilities would try to make up in volume the lower retail rates that simple supply and demand would set?

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