Wednesday, December 10, 2008

Divining the Future

My last post suggested that price fluctuations are a good thing as such fluctuations convey important information about the current balance of supply and demand.

This observation begs the question if the current price of a commodity provides sufficient information. The answer, of course, is "no." The current price does not provide sufficient depth for a rational decision making process. The current price of gas is a triviality. What really matters to us is the price of fuel when it is time to consume fuel. In most cases, people make the decision to consume fuel well before they purchase it.

The solution, to this quandary, of course, is to let people purchase fuel when they make their decisions. When you buy a product in advance, you have a futures contract. Futures contracts are wonderful things in that they allow you properly price your goods.

As the people selling oil know all about annual fluctuations in prices, the price for contracts at the height of the season would be higher than those when demand is low.

The futures contract adds depth to the price equation.

You can also create systems that communicate information about the current power supply through direct communications. For example, the local electric grid will have a mix of solar, hydro and other fixed power generation mechanisms along with expensive backup systems that come online during peak capacity.

The power grid can communicate information about current capacity and demand. At peak demand, the system could send a signal telling the world that they are at peak capacity. Rather than turning on new capacity, the signal would automatically turn off less essential services. Likewise, when demand drops below base production, the system could send out signals and products that store energy could on; so as not to waste the capacity. Devices that turn on and off could have special metering and pricing.

Financial tools and technologies that help us match our energy consumption to production allow us to maximize the return for invested resources and should be encouraged.

(I will have one more post on this topic.)


Scott Hinrichs said...

The power company already will install a device that cycles your air conditioner off during higher usage times. They will pay you $20 for letting them install it. It's an opt-in thing, so you don't have to participate unless you want to.

y-intercept said...

The power company has been pushing this stuff for decades. Oddly, their is often political backlash.

To have intelligent metering, the billing system has to know what you are doing with the power. This violates (gasp) privacy rights.

If you turn the swamp cooler on when the switch turns the air conditioner off, then there is no point to the system.

To have a workable contract, there really has to be quality communications between producers and providers.