As Montana legislators begin another session, they’ll no doubt consider energy policy. Rather than trying to pick an energy winner, e.g., wind power, they should focus on a far simpler task: crafting policies that promote energy conservation. This will be easy—but only if consumers know the true cost of their energy use.

Today’s energy regulations often mask real costs. While this advances short-term political agendas (why else would we have them), over the longer term it has pernicious effects. Here’s why. Prices carry information that guides decision-making. When electricity prices are distorted downward, conservation and innovation are discouraged. The legislature should encourage socially responsible ways to decrease energy consumption.

If consumers don’t face the real cost of using electricity, especially during peak hours, utilities build new power plants for short-lived (sometimes only an hour or two a day, a few days a year) spikes in demand. Consumers pay for these plants in the form of higher electricity prices. Further, the environment suffers, especially if the energy comes from a new dam or coal fired power plant.

Ideally, the retail price of electricity should fluctuate hourly. This would foster the adoption of smart electrical meters that give consumers and their ever-smarter appliances real time information about the value of their energy use. (It would be socially and individually better if dishwashers and clothes dryers were run during hours of low demand.)

In 2004, California ran a pilot project giving 2,500 customers smart meters. The average customer reduced his demand during the hottest summer hours by 13 percent; this in response to peak prices five times the standard rate. And customers who had smart thermostats (which automatically raise the temperature two or four degrees during high demand) reduced their consumption about 27 percent.

I’m less sanguine about the legislature’s 2007 renewable energy portfolio standard that mandates 15 percent of Montana’s power come from renewable sources by 2015. Advocates claim the U.S. can reliably and economically generate 20 percent of our power demands with wind. Texas, the nation’s wind power leader, generates 2.9 percent of its electricity from wind. Their experience highlights problems, especially a lack of transmission capacity and power variability.

The former problem plagues Montana, a state the size of Japan with less than a million people. (Even in Montana, most people don’t live where the wind blows best.) To help overcome our geographic isolation, Governor Schweitzer is pushing for the construction of a new 214-mile transmission line linking Montana and Alberta. (Northern Montana and Southern Alberta are two of the windiest places in North America. Montana is rated number five in the U.S. for wind power potential.)

Wind variability is another serious problem. Wind farms tend to produce the most energy when it’s not needed—at night and in the spring and fall, periods when demand is low. The hottest, highest-demand days of the year occur when wind’s contribution is lowest. Last February an unexpected cold front caused Texas’ winds to slow. As power ran out, backup generation proved inadequate. To protect the grid, operators interrupted large industrial and commercial users, an expensive fix.

Given the unreliability of wind, it must be backed up, typically with natural gas fired plants that can quickly ramp up (and down) production. This adds significantly to the cost of wind power. The wind may indeed be free, but harnessing it is not. Cambridge Energy Research Associates report that once these costs are counted, the price of averting CO2 emissions by building a wind plant rises to $67 a ton. Other emissions-reduction strategies, such as increasing efficiency at current electrical plants, cost between $10 and $30 a ton.

When wind energy becomes affordable the government need not mandate that people buy it. We should avoid a renewable energy portfolio that rewards alternative energy suppliers unable to attract capital investment or consumer demand on the merits of their product.

Real time pricing and smart metering will generate incentives for conservation. Price signals work. Give prices a chance.