Thanks, Lynne. You are absolutely right. A $6 slice of pizza may be worth $10 to me on any given day. (N.B. I do not pay $X for the flour, $Y for the tomatoes, and $Z for the energy that fires the ovens. I buy a well-defined package of food services that provide 1) nutrition, 2) convenience (time and place of consumption), 3) perhaps status (the new place to hang out), etc. Further, I cannot change the efficiency of nutrition conversion very much. My digestive system is more or less fixed.) With regard to energy, I would suggest that a $0.20 per kilowatt-hour of energy is not merely a imperfect measure of value. No one actually wants a unit of energy. It's value is to power one of a hundred end-uses in a home. Unlike digestion, each end-use could be more efficient in the conversion from commodity to service. The few kWh I use each year to recharge my mobile phone is VASTLY underpriced. (It's about $1 per year and I'd pay a lot more if I had to.) The huge number of kWh I use each year to cool my Houston home are overpriced because the Texas Legislature, PUC of Texas, and market participants have forgotten what matters. They do not want to nurture the institutions necessary to create competitive services that will lower costs. From a data perspective, retail electricity prices are all we have. From an economic theory perspective, I don't think they make any sense. Pizza eaters want pizza. Electricity consumers do not want electricity -- they want hot showers and cold beer. ... I am not suggesting that I know how to do better. I am suggesting we must try. ... I look forward to reading more!
Excellent summary and commentary. Have you given thought to an analysis that focuses on the value of electricity to consumers rather than on the retail and wholesale commodity prices? While cents per kWh and dollars per MWH are most easily accessible, they do not get to the heart of what consumers really care about -- the size of the utility bill. And to take this one step deeper, the cost of energy services is a combination of commodity cost, costs to invest in appliances that consume energy, and costs of maintaining devices. This is messy because one of the "devices" is the building that is heated, cooled, and conditioned! ... As we have discussed many times, traditional approaches to examining the electric sector give little attention to end-use energy efficiency. EE remains the lowest-cost means of lowering the cost of energy services. And EE remains -- to a large degree -- subject to all sorts of institutional barriers. More EE would provide much greater ECONOMICALLY-efficient outcomes.
Thanks, Nat. From both an economic theory perspective and a data perspective, the end-use retail prices to consumers are the best feasible indicator we have of consumer value, even if that's an imperfect indicator. Individuals have personal, private, subjective preferences that are not knowable by others, and the only way to infer anything about consumer value is through observing actual decisions. So when you buy a slice of pizza for lunch for $6, the only inference I can draw is that you value that pizza at least at $6 at that time. I don't know your true willingness to pay (and indeed you may not be aware of it when you are outside of a situation where you have to make a choice), so I don't know how much consumer surplus you realize with that consumption.
Fascinating read. This actually helps me think more clearly on a project I am working on in the car insurance market.
Thanks, Lynne. You are absolutely right. A $6 slice of pizza may be worth $10 to me on any given day. (N.B. I do not pay $X for the flour, $Y for the tomatoes, and $Z for the energy that fires the ovens. I buy a well-defined package of food services that provide 1) nutrition, 2) convenience (time and place of consumption), 3) perhaps status (the new place to hang out), etc. Further, I cannot change the efficiency of nutrition conversion very much. My digestive system is more or less fixed.) With regard to energy, I would suggest that a $0.20 per kilowatt-hour of energy is not merely a imperfect measure of value. No one actually wants a unit of energy. It's value is to power one of a hundred end-uses in a home. Unlike digestion, each end-use could be more efficient in the conversion from commodity to service. The few kWh I use each year to recharge my mobile phone is VASTLY underpriced. (It's about $1 per year and I'd pay a lot more if I had to.) The huge number of kWh I use each year to cool my Houston home are overpriced because the Texas Legislature, PUC of Texas, and market participants have forgotten what matters. They do not want to nurture the institutions necessary to create competitive services that will lower costs. From a data perspective, retail electricity prices are all we have. From an economic theory perspective, I don't think they make any sense. Pizza eaters want pizza. Electricity consumers do not want electricity -- they want hot showers and cold beer. ... I am not suggesting that I know how to do better. I am suggesting we must try. ... I look forward to reading more!
Excellent summary and commentary. Have you given thought to an analysis that focuses on the value of electricity to consumers rather than on the retail and wholesale commodity prices? While cents per kWh and dollars per MWH are most easily accessible, they do not get to the heart of what consumers really care about -- the size of the utility bill. And to take this one step deeper, the cost of energy services is a combination of commodity cost, costs to invest in appliances that consume energy, and costs of maintaining devices. This is messy because one of the "devices" is the building that is heated, cooled, and conditioned! ... As we have discussed many times, traditional approaches to examining the electric sector give little attention to end-use energy efficiency. EE remains the lowest-cost means of lowering the cost of energy services. And EE remains -- to a large degree -- subject to all sorts of institutional barriers. More EE would provide much greater ECONOMICALLY-efficient outcomes.
Thanks, Nat. From both an economic theory perspective and a data perspective, the end-use retail prices to consumers are the best feasible indicator we have of consumer value, even if that's an imperfect indicator. Individuals have personal, private, subjective preferences that are not knowable by others, and the only way to infer anything about consumer value is through observing actual decisions. So when you buy a slice of pizza for lunch for $6, the only inference I can draw is that you value that pizza at least at $6 at that time. I don't know your true willingness to pay (and indeed you may not be aware of it when you are outside of a situation where you have to make a choice), so I don't know how much consumer surplus you realize with that consumption.