Time-of-Use Pricing Could Help China Manage Demand

Author:Emmett Pepper
Position:J.D. candidate, May 2012, at American University Washington College of Law
FALL 2010 18
Time-based pricing polic ies can efficiently address rising
energy consumption by offering incentives to minimize
electricity demand spikes during peak usage.1 With Chi-
na’s urban population predicted to surpass its rural population in
2015 and to be nearly double the rural population by 2030, there
is a growing need for solutions to meet urban electricity demand.2
As China’s middle class continues to grow, it will likely cause
additional stress on electricity grids w ith the increase in use of
air conditioning and other electrical appliances.3 If China imple-
ments a real time pricing model soon it could create a regulatory
scheme that avoids the problems Western countries encountered
in their attempts to manage demand through time-based pricing.
“Demand-side man agement” (“DSM”) includes policies
aimed at reducing electricity usage, including conservation-ori-
ented efforts such as consumer education campaigns and light
bulb trade-in programs, as well as an array of systems categorized
as “smart grid,” which utilize electricity usage information to man-
age demand.4 Two types of smart grid development, time of use
(“TOU”) pricing and real time pricing (“RTP”), both charge con-
sumers more during the times of day (and year) with the highest
electricity use and when the grid is most taxed, but have different
pricing mechanisms.5 RTP changes the price charged to consum-
ers, hour-by-hour, based on the wholesale price of electricity at
the moment it is being used; TOU pricing establishes graduated
electricity rates for blocks of time.6 TOU is more commonly used
for residential customers because of its simpler structure.7 Estab-
lishing TOU pricing in China can directly address the problems
caused by peak demand, especially if used in tandem with efforts
to meet demand like modernizing the electricity grid, increasing
electricity generation, and adopting conservation programs.8
China may still face problems from insufficient supply dur-
ing peak electricity use even though it is working to upgrade its
grid and increase production.9 Blackouts and bro wnouts occur
when electricity demand outstrips supply, often leading govern-
ments to rely on pollution-spewing generators and other power
plants or “load shedding” (planned blackouts).10 In China, this
occurs bec ause poor transmiss ion lines “leak” electricity from
power plants located many miles from large urban areas where
much o f the electr icity is co nsumed.11 Policymakers in China
should integrate TOU policies into new developments to avoid
the extreme peaks of growing middle class electricity use, which
will persist despite having a modern grid.12
China has started implementing time-based demand reduc-
tion strategies to help meet electricity demand, but is only in
the early stages of doing so. Since 1996, after determining that
industrial users consumed at least half of electricity during peak
by Emmett Pepper*
* Emmett Pepper is a J.D. candidate, May 2012, at American University Wash-
ington College of Law
periods, the Beijing electric utility implemented TOU pricing and
other demand incentives to encourage industrial electricity users
to shift to off-peak periods.13 Shanghai has made the most sig-
nificant strides in residential TOU pricing, and since 2001 has
given a fifty percent discount at night to residential customers who
purchase a TOU-capable meter.14 The Beijing and Shanghai pro-
grams have seen some success, but the number of consumers who
voluntarily sign up for the programs limits their impact.15
Examinin g exis ting t ime-based pricing programs in the
West can guide policymakers in China seeking to establish effec-
tive and equitable pricing structures. For example, in early 2010,
Ontario, Canada’s utility began requiring residential consumers
to install a TOU meter.16 Prices rose significantly, partly due to
the TOU pricing, but also due to an especially hot summer, caus-
ing a public backlash against TOU pricing.17 Thre e criticisms
emerged about the Canadian program: 1) that TOU raised rates
across the board, even for those who shifted some electricity use
to of f-peak times, 2) that TOU had a disproportionate impact
on the poor, and 3) that TOU is ine ffective in reducing peak
demand.18 Ontario’s pro blems with its TOU program may be
due to the fact that, compared to the non-TOU rates, the off-peak
savings (eighteen percent) are less than the increase during t he
“mid-peak” and “on-peak” hour s (twenty-three to thirty-seven
percent),19 which is less significant than other TOU discounts.20
A recent Chinese guidance document may help China avoid
Ontario’s problems.21 The suggested graduated tariff price sys-
tem estimates that seventy to eighty percent of residents will be
unaffected by the increase; only top electricity users will see an
increase in their electricity bills.22 Since the poor use little elec-
tricity, the policy will reduce the impact of all rate changes on
the p oor, including TOU rates.23 Implementation of the guid-
ance policy will encourage conservation and create an equitable
regulatory framework for TOU implementation.
To maintain energy reliability while continuing double-digit
economic growth, China should implement mandatory TOU
pricing models immediately, particularly in the coastal c ities
far from electricity generation. China should structure the rates
equitably to exempt the poor from price increases but make the
peak price difference high enough to have a meaningful impact
on wealth ier, high-energy u sers, causing the m to change elec-
tricity use behavior.
Endnotes: Time-of-Use Pricing Could Help China Manage
Demand on page 62