The High Cost of Summer Energy Price Spikes

Forecast for the future: hotter summers, more peak power consumption, and higher electricity bills. Photo by Dan Logan/iStock

On one of the hottest days on record in recent Massachusetts history—August 2, 2006—the mercury hit 37 degrees Celsius (about 99 degrees Fahrenheit), with 65 percent humidity. It was a scorcher, and people across the state flipped on their air conditioning units and fans. Energy consumption rose to 50 percent higher than typical off-peak levels.

But it wasn’t just consumption that rose. During those peak hours, the price of electricity also went up—by 400 percent.

A new study by Karina Véliz (GRS’09,’14), a former Boston University Earth and environment graduate student, and Robert Kaufmann suggests that such price spikes will be the primary drivers of electricity cost increases in response to climate change. As the climate warms globally over the coming two to five decades to a projected two degrees C higher than in the years between 1976 and 2005, the frequency of hot, humid, crank-up-the-AC days in Massachusetts is also projected to rise. In this warmer climate, residential consumers could face increases in electricity bills of 12 percent, and commercial consumers could see increases of 9 percent. The research was published online in Energy Policy in March 2017, with co-authors including Cutler J. Cleveland, BU professor of Earth and environment, and Anne Stoner, a research assistant professor at the South Central Climate Science Center at Texas Tech University.

“On hot, humid days with high electricity consumption, you also have these huge and striking peaks in price,” says first author Véliz, now a faculty member at the Universidad Diego Portales and a research fellow in the Center for Climate and Resilience Research in Santiago, Chile. “That has effects for the consumer in terms of the electricity bill they have to pay.”

Previous studies have projected rises in electricity consumption as the climate warms, but this is the first study to look at how increases in consumption will affect the price per kilowatt on an hour-by-hour basis. The findings suggest that managers of electrical utilities, who normally assess the need for new power plants based on population and economic activity, also need to factor in climate change. “Given the expected change in climate, these price spikes could happen more frequently in the future,” says Kaufmann, a BU professor of Earth and environment. “If we don’t like this future, we need to do something about it.”

Price spikes for high-demand items like Super Bowl tickets aren’t that surprising. There are only so many; when they’re gone, they’re gone. But the electric grid expands elastically to meet demand. As people flip on light switches and dishwashers, grid managers call additional power plants into service to feed more electricity into the grid. “It’s an unbelievable machine in which the supply and demand basically match up every second,” says Kaufmann. “There’s nothing else like it.”

The trouble begins when demand rises sharply, as on a hot day. The power plants that run all the time can’t supply enough juice, so grid managers fire up plants that don’t operate as often or as efficiently. Some plants run only when needed to save the day. “These plants have to make all their money during those few hours they’re turned on, so the power they supply becomes very expensive,” says Kaufmann.

In regions of the US where electricity prices are regulated, such price fluctuations remain hidden. But in Massachusetts, the electric grid is unregulated, so the price of electricity actually reflects the cost the grid pays the power plants. Véliz used data about electricity consumption and temperature from Massachusetts between 1990 and 2010 and information about consumption and price from Massachusetts between 2004 and 2012 to forecast how temperature changes will influence electricity use and price in the future. During those time frames, fuel types and costs varied substantially, but these fluctuations did not significantly influence the relationship between temperature and price.

She also drew on current models of climate change, which project a 2-degree C temperature increase between 2044 and 2070. By the time the planet hits this 2-degree warming mark, Véliz and Kaufmann estimate that the consumption of electricity could be 15 percent higher in the summer months and 6 percent lower in the winter.

Electricity prices, however, will go up on hot days—gradually at first, then suddenly. At low levels of increased consumption, prices will rise at the same rate as consumption. But as summer energy demand rises to moderate and extreme levels—for instance, when everyone has their ACs running on high—it will become more and more difficult for grid managers to find cost-effective ways to meet demand. At this point, prices will rise dramatically.

Previous peer-reviewed academic studies ignored these price increases, painting a rosier picture for future electricity expenses. “They missed this large price effect,” says Kaufmann. “In terms of the total effect on consumer bills, the change in price is much more important than the increase in consumption.”

The study suggests that investments in power plants that can cost-effectively meet peaks in demand on hot days may be in order. New so-called peaking plants will likely be added in the coming decades, but market forces alone may not generate enough of them to dampen price spikes. “New policies may be needed to generate sufficient investment,” says Kaufmann.

In addition, new tools that provide consumers with peak price information could help them decide how best to spend their electricity dollars. Right now, consumers simply receive a bill at the end of the month, so they have no way of knowing how the electricity rates changed during that month. But if they knew which hours were peak, and were alerted when prices started spiking, they might change their behavior. “Maybe they won’t use the AC during a peak hour if they have real-time price information,” says Véliz, whose work was funded by the Chilean National Commission for Scientific and Technological Research.

Véliz is following up on this research by applying the new price-savvy modeling approach to electricity use in other areas of the world, including South America and Europe, where the effects of climate change on electricity consumption and price may be different. She is also investigating ways to understand how climate change might influence changes in the prices of other services, such as healthcare, as hot days increase demands for emergency room and other health services. “Price is going to be an important component of the changes ahead,” she says.