How to Control Peak Electricity Demand: Policy evaluation

OHASHI Hiroshi
Program Director and Faculty Fellow, RIETI

The third summer since the Great East Japan Earthquake is approaching. In retrospect, we had to be conscious about power saving during these past couple of summers. Immediately after the earthquake, the government requested power conservation with numerical targets to the jurisdictions of the Tohoku Electric Power Company, the Tokyo Electric Power Company (TEPCO), and the Kansai Electric Power Company (KEPCO). Especially, large industrial consumers were ordered to limit their use of electric power based on Article 27 of the Electricity Business Act. In the following year, 2012, although power conservation targets for central and western Japan were eased due to the resumption of operations of Units 3 and 4 of the Oi Nuclear Power Plant, a 10% conservation target was introduced for the jurisdiction of KEPCO.

There is concern about the possibility of severe supply shortages this summer due to the uncertainties in the restarting of the nuclear power plants and in the reliability of renewable energy. The government is likely to request power conservation again without setting numerical targets. There is no sufficient supply surplus (reserve margin) in the jurisdictions of the nine electric power companies, except for Okinawa. Should any unexpected interruption of operations at thermal power plants occur, or should the utilization rate for industrial and business uses increase above an anticipated level perhaps due to economic recovery, severe supply shortages could become a reality. Provided that power supply is difficult to increase in the short term, efforts to contain peak power demand in the summer will continue to be an important policy issue in Japan.

Evaluating demand-controlled power supply contracts

Electricity demand was successfully reduced at a level beyond the conservation target set by the government and electricity companies in the summer of 2012. This was not only because many electricity consumers including households became increasingly conscious about energy conservation, but also, more importantly, electric power companies endeavored to promote demand-controlled power supply contracts (Note 1) designed to encourage industrial customers to curb their power consumption during peak-load hours or shift demand from peak to off-peak times. In particular, in the service areas of TEPCO and KEPCO, a type of demand-controlled power supply contract requiring customers to control power consumption in a planned and systematic way ("systematically-controlled power supply contracts") covered 1.67 million kilowatts (kW) and 1.55 million kW of power demand respectively, presumably having made significant contribution in controlling peak-time power demand among industrial and business users.

In its report put forward in November 2012, the Electricity Supply-Demand Review Committee, a government panel, conducted a cost analysis of various types of demand-controlled power supply contracts introduced by KEPCO and concluded that they were effective. Specifically, the report says that the cost of electricity would be reduced by approximately 40 yen per kilowatt hour (kWh) for customers under KEPCO's systematically-controlled power supply contracts and by approximately 17 yen per kWh for those under another type of demand-controlled power supply contract called the Demand Cut Plan. It seems, however, that these figures simply represent the differences between the electricity price rates applicable under those newly-introduced, demand-controlled power supply contracts and those under the conventional power supply contracts, i.e., when no specific demand-side measures are implemented. And it is not yet clear whether and to what extent these new contracts have actually contributed to peak demand control, the ultimate goal for demand-side measures.

My research team at the University of Tokyo surveyed approximately 15,000 manufacturing companies that own factories in the Kanto and Kinki regions, and we recently reported the preliminary results of the survey (Note 2). Our panel regression analysis found the following three characteristics of the effects of demand-controlled power supply contracts (Note 3) introduced in the summer of 2012: (1) electricity costs for customers were reduced by approximately 12% on average; (2) their load factor was rather worsened as total power consumption was reduced more than peak power demand; and (3) while the percentage decrease in electricity fees is greater for larger scale customers, there is no significant difference in the percentage decrease by firm size. In this analysis, we estimated the impact of the demand-controlled power supply contracts alone on power demand, by statistically controlling for other factors that could possibly attribute to the increased awareness of electricity conservation.

Measures to improve efficiency in generating capacity

Our preliminary results are consistent with the results of the cost analysis outlined above in the Electricity Supply-Demand Review Committee's report. That is, demand-controlled power supply contracts have been serving as an incentive for customers to reduce their power consumption, which has resulted in the significant reductions in electricity bills. While the lower electricity bills have been naturally welcomed by customers, reducing per-hour power consumption is not the primary objective of demand-controlled power supply contracts. Instead, they should be geared toward curbing peak power demand of customers. By doing so, it becomes possible to increase the capacity utilization of the existing power generation facilities in Japan and minimize the need for investments in new power generation in the long run.

The existing two types of demand-controlled power supply contracts, which offer discounted rates for electricity consumed during specific time slots over a specific period of time agreed to beforehand, are advantageous in that the power consumption plans set forth therein provide a sufficiently reliable basis for demand forecasts. However, they are inevitably inefficient as a response to cope with power shortage. Demand-controlled power supply contracts that would require customers to control power consumption upon advanced notice ("control-as-needed type power supply contracts") and demand response (DR) programs that induce voluntary power conservation efforts through third-party aggregators would be more desirable measures to control peak demand. But these are various issues that must be examined in order to ensure the effective implementation of these schemes.

In examining the dynamics of power supply and demand, it is important to review the existing government policies and measures as to whether they are designed and utilized in a way to achieve their intended goals effectively and efficiently as compared to proposed alternative policies and measures. In other words, the government needs to design cost-effective demand- and supply-side policies in a theoretically sound manner, based on the rigorous quantitative analysis of the demand control measures currently in place as compared with the alternative option of building new power generating facilities. If the government fails to have such a comparative perspective and if the burden of the ongoing power supply constraints continues to fall heavily on one side, i.e., either power users or power suppliers, it would be difficult to ensure the sound operation of power generation and supply business over a medium- to long-time horizon. This would ultimately endanger the future of the Japanese economy.

It is a major step forward that the government announced the electricity supply and demand forecasts for this summer earlier than it did the last two years. What is needed for the future is to deepen our understanding of electricity demand. More specifically, in discussing measures for peak demand control, we need to have a clear idea as to how much of the change in electricity demand is attributable to the effect of electricity prices and how much is the result of electricity conservation efforts taking root.

April 23, 2013
  1. ^ Demand-controlled power supply contracts can be broadly classified into the following three types: (1) control-as-needed type power supply contracts under which users would be required to suppress power usage upon advance notice, etc. from the power company when electricity supply becomes tight; (2) systematically controlled power supply contracts under which users would keep their power usage according to a prearranged time schedule, i.e., during specific hours on specific days within the period determined by the power company; and (3) discount-for-efforts power supply, under which power companies would reward users for their conservation efforts by offering discounts at a certain rate per kW of electricity conserved during peak time (TEPCO's Demand Diet Plan and KEPCO's Demand Cut Plan fall under this type).
  2. ^ The preliminary results were published as Discussion Paper CIRJE-J-246 from the Center for International Research on the Japanese Economy, Graduate School of Economics, University of Tokyo and is available at:
  3. ^ The term "demand-controlled power supply contract" in our study refers to (2) and (3) in Note 1.

April 23, 2013