The answer to Eskom’s woes – dynamic pricing
In its basic nature, Eskom is failing to keep the lights on because of the supply-demand mismatch.
Although underpinned by technology, this is an economic problem and it makes sense to look at economic theory for possible solutions.
The law of supply and demand indicates that if there is a low supply and a high demand, the price will be high. In contrast, the greater the supply and the lower the demand, the lower the price will be.
In part, it is the attempt to defy this law that is resulting in the unavailability of electricity.
Dynamic Pricing – an effective strategic response
Dynamic Pricing means prices are not fixed but change as a function of other variables, mostly supply and demand.
It is not a new concept. We all know that tomatoes cost less when in season and the supply is higher than demand.
What has changed now is the flexibility and the responsiveness to which dynamic pricing can be implemented – from seasonally to real-time.
The idea is not necessarily to be different but to look at the proven tools we have and creatively apply them to manage 21st-century challenges.
Uber, the on-demand private driver service company, realized that the same factors influencing increased demand also acted to reduce supply.
At midnight on New Year’s Eve, potential clients are more desperate for transport, and yet for the same reasons potential drivers are reluctant to offer their service. The result is a “service blackout”.
In response, the company introduced a dynamic pricing model where increasing demand during supply shortage conditions triggers higher prices. The effect was to achieve an equilibrium position and ensure “service continuity.”
Eskom has run campaigns to inform consumers about the supply status and encourage them to reduce demand. Maybe it is now time to let consumers put their money where their mouth is.
With a well-crafted dynamic pricing model, electricity during high demand times can be priced differently than units consumed at times of low demand.
This could be based on “Time of Use” or “Critical Peak Period”. Gulf Power and Tampa Electric Company have implemented similar concepts successfully.
Regulation and Politics
The National Energy Regulator of SA, Nersa, is more of an ally than a hurdle. Its role in protecting consumers is critical and any innovative problem-solving initiative must not neglect this fact.
For it to work, consumers have to feel protected. This view can also be valuable in the current tariff hikes discussions as only targeted peak-period consumption tariffs may be increased instead of a blanket approach.
Alternative views may also suggest that such a “commercially-minded” response may not be “voter-friendly” and will face opposition from politicians.
However, I am of the view that the role of the regulator acts to balance and de-risk the political parties by ensuring that due process, public opinion, and representation is considered.
While this may affect the levels of price and demand triggers for the pricing model, this will only serve to limit the effectiveness of the approach rather than nullifying it altogether.
Conclusion
The energy challenge currently facing the country is multi-faceted and requires a multiplicity of responses working together for collective good.
It is clear that a well-crafted, simple, and practical dynamic pricing model can be a useful tool for Eskom in dealing with the current supply-demand mismatch.
Written by Grant Chivandire – an electrical engineer who works as a solutions manager within the mobile telecommunication sector. He writes in his personal capacity.
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