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Subject: Market Analogy: Plane tickets

Title: Market Analogy: Plane tickets

This is a quick note to share a thought that the market for electricity should have some strong similarities to the market for plane tickets.

Supply is very inelastic in the short term.  There are only a given number of flights between Minneapolis & Chicago on a given day or amount of KW that can be supplied.  Supply cannot be easily increased in a month / year / decade.  The good (the airline seat or KW capacity) is perishable because once the time passes (departure time / 15-min time increment) it can no longer be sold. The marginal cost of goods (fuel & labor) in most cases is a very small percentage.

This is starting to change slowly in that there are increasingly ways to store (inventory) the good (batteries, ice storage, etc), but the capacity to inventory is a minuscule fraction.

I can generate my own power or I can drive myself to Chicago if prices are too high.

There are of course many reasons why the current markets are different.  But to Tobys point, RTP is only attractive to consumers if I can plan based on future prices.  In my Texas RTP example, we have to guess (http://www.oasis-open.org/committees/document.php?document_id=33285&wg_abbrev=energyinterop ) at what constitutes a low or high price.

Maybe a key part of demand management will be allowing smaller customers to pre-purchase blocks of KW in advance (like large industrial customers do today).  Ill plan to make ice for two hours every night and I see that I can buy that now for $5 per night (500 * $0.01 per KWH) between 3 4 am every day for the next month.



p.s. Having said all that, I continue to hold the position that we should focus on the simple signals first (change in price, change in DR level request).

See also:  http://en.wikipedia.org/wiki/Yield_management#Airlines

David Wilson

Enterprise Solutions Portfolio Manager

Trane Commercial Systems

Ingersoll Rand

Office: +1.651.407.4168

Mobile: +1.612.741.2759

Email: davidcwilson@trane.com


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