Thursday, October 26, 2017

Paying People Not To Use Electricity - The Fatal Flaw

In the first article of this series I identified a beautiful scam. In this article I explore the fatal flaw that makes it possible. It wasn't obvious to me at first and given the community enthusiasm for paying people not to use electricity, it mustn't be obvious to most others either.

Without hearing the proponents pitch, people I've discussed this with have said that's daft I don't believe anyone would think otherwise, just as the implausibility made the emperors story unappealing when I was a child. However, my colleagues thought paying people not to use electricity was inspired. For me the concept is so obviously daft it defies belief that it could have lasted this long and grown into government policy

Once you know, it can never be seen the same way again. The genius can be admired but the wonderment is gone.

It led to this strange situation where I was trying to convince colleagues of what seemed an obvious truth and utterly failing. In retrospect I think, like Shawn Spicer's claim on the inauguration crowd, the greater truth was that if paying people not to use electricity was truly daft the personal consequences would be negative. It's better to prefer alternative facts. The other possibility is I was wrong and there is no fatal flaw. I've thought hard in the intervening thirteen years and I've not been able to devise nor have I heard a good counterargument. If there is no fatal flaw it would be painfully cathartic for me to learn the truth. 

The Fatal Flaw 

If you don't accept the fatal flaw as truth then everything in this series is waffle or perhaps there are multiple truths in accordance with epistemic relativism.

Everything hangs on this:-

  • Contention: The amount of electricity that would have been consumed in the absence of payment not to consume it is unknowable.
  • Corollary 1: The volume of electricity that would have been consumed if people hadn't been paid not to consume it can only be guessed/estimated. 
  • Corollary 2: In any peak some consumers will consume less than estimated for reasons unrelated to being paid.
  • Corollary 3: If you pay by volume for something that can't be measured people will sell you a lot of it.
  • Corollary 4: A consumer not paying market price should consume as high a proportion as possible of their total energy at peak times so as to maximise the amount they will receive when responding to a request to switch off.
  • Corollary 5: A consumer that can increase market price by not consuming should consume as high a proportion as possible at peak times while ever the increase in consumption cost is exceeded by payments for switching off. 

It is as simple as that but a lot flows from it. The whole purpose of demand management is to reduce consumption when electricity is expensive or more often shift consumption from times of high demand to times of low demand. However, the incentive scheme incentivises exactly the opposite until a payment is offered. As well, some would have switched off anyway, perhaps they were out that day.

So paying people not to use electricity means accepting their claims of how much they should be paid or at best guessing while incentivising behaviour that makes the problem you are trying to solve worse. All this when incentives could be aligned with desired behaviour by selling electricity at cost plus a retail margin.

Sunday, October 15, 2017

Paying People Not To Use Electricity - A Beautiful Scam

Paying people not to use electricity is not on the scale of the WMD claim that justified invading Iraq but more exciting for me because I was there when the idea was born, just after that war. It started small and I expected it to die young but it has grown in stature to the point that it gets a mention by Sarah Hanson-Young on QandA, praise everywhere you look and there is now a demand response trial. The basic idea is to sell electricity below cost and then pay people not to buy it. Now that it's public policy, there's an option for the man in the street to climb on the bandwagon and win some pocket money extracted from the pockets of those that ignore the opportunity. Those that take advantage will be paid to help the wider community understand the fatal flaw, but anyone interested should do so fast as surely this one can't last long.

We are a nation blessed with an abundance of sun, wind, coal and gas and back in 2004 this was reflected in Australia having close to the worlds cheapest electricity. That was when a CSIRO team started work on the idea of paying people not to consume electricity. I was part of that team and for a short while shared in the excitement. Nobody is penalised or coerced into contributing to reductions in peak electricity demand but those that make the effort benefit. People can generate value by not doing something and get paid. What could be better than that? After a light bulb moment though, I could never view the idea this way again, it was so obviously daft. I pointed out the fatal flaw to colleagues and suggested we should try other approaches to demand side response. Other approaches though were boring, incrementalist and difficult to make cost effective at the low power prices of the time. Back then, I'd never have predicted that weaknesses in electricity industry oversight would be exploited so successfully that Australia now has close to the worlds most expensive electricity.

Growth in electricity prices over 10 years. Source: Rod Sims - National Press Club Speech, 20 September 2017. For a more complete analysis see a comparison of Australian and US electricity prices over time.

My colleagues were more prescient, the fashion for developing novel methods of extracting funds from electricity consumers was at its dawn. Electricity had been a boring industry for many years until that time. My insights got some support from my boss, who'd also been drafted into the project, but outright hostility from those in charge. They wouldn't confront the fundamental problem, and eventually I was no longer allocated to the project. I couldn't understand the hostility, I thought I was helping the team by suggesting we adjust our goals to avoid inevitable failure. In retrospect I've come to the view my colleagues were far wiser, they were pursuing a more useful truth.

A truth can be harnessed to achieve useful outcomes. A truth doesn't have to be absolute, true in particular circumstances is sufficient, even if that truth becomes untrue outside the relevant domain. We may scoff today, but Ptolemy's geocentric model for planetary motion was used to prepare astrological and astronomical charts for over 1500 years. No one scoffs at Newtons law of universal gravitation. It is a useful truth with continuing practical application but in Einstein's general relativity, gravitational force is a fictitious force arising from the curvature of spacetime. The most favourable outcome a research team can hope for in CSIRO is to be well funded and that requires exciting novel ideas. Boring incrementalist approaches will not be funded, researchers must promise something grander than anyone else. This is a fundamental truth, but everyone's proposals are grand so it's also impossibly hard. When there are many excellent weavers how does a weaver win the contract to supply clothes for the emperor. He must promise something others can not, the finest, best suit of clothes from a fabric invisible to anyone who is either unfit for his position or hopelessly stupid should do it. As a child I hated this story because I thought it ridiculous. I couldn't understand the desirability of keeping up the pretense. As I age, I find the truth it reveals to be profound. In the circumstances of the courtiers it truly was a beautiful suit, the quality of which contributed to their good standing with the emperor and continued well being. There can be no greater success in CSIRO than a world leading project that has managed to grow for thirteen years and become a major public policy initiative. It is a truly excellent project.

An emperors love of beautiful weaving provides for a great yarn which is often interpreted in different ways. A short and seemingly simple tale that's really quite deep.

The emperor looked a bit of a dill after the boy revealed a greater truth but he carried on with the parade. The weavers kept their fee and the emperor kept his throne, so no harm was done. Similarly when Hans Blix was urging caution, the best insider response was to ignore the doubts and discredit him. Those urging war would get to enjoy the spoils, so the existence of WMD was a useful truth even if it would eventually be mocked, much like the fate that befell Ptolemy's geocentric model. To maximise income from reducing electricity consumption in times of peak demand consumers must first shift as much of their consumption as possible to times of peak demand. This is the opposite of the purported aim. Paying people not to consume electricity will eventually lose favour but the emperor will carry on and the CSIRO heroes will keep their honors and promotions. Australians will pay a bit more for electricity but in truth, that doesn't really matter much.