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Wealth Transfers Among Large Customers from Implementing Real-Time Retail Electricity Pricing

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  • Severin Borenstein

Abstract

Adoption of real-time electricity pricingÑretail prices that vary hourly to reflect changing wholesale prices removes existing cross-subsidies to those customers that consume disproportionately more when wholesale prices are highest. If their losses are substantial, these customers are likely to oppose RTP initiatives unless there is a supplemental program to offset their loss. Using data on a sample of 1142 large industrial and commercial customers in northern California, I show that RTP adoption would result in significant transfers compared to a flat-rate tariff. When compared to the time-of-use rates (simple peak/offpeak tariffs) that these customers already face, however, the transfers drop by up to 45%; even under the more extreme price volatility scenario that I examine, 90% of customers would see changes of between a 4% bill reduction and an 8% bill increase. Though customer price responsiveness reduces the loss incurred by those with high-cost demand profiles, I also demonstrate that this offsetting effect is unlikely to be large enough for most customers with costly demand patterns to completely offset their lost cross-subsidy. The analysis suggests that adoption of real-time pricing may be difficult without a supplemental program that compensates the customers who are made worse off by the change. I examine possible Òtwo-part RTPÓ programs, which allow customers to purchase a baseline quantity at regulated TOU rates, and show they can be used to greatly reduce the transfers associated with adoption of RTP.

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Bibliographic Info

Article provided by International Association for Energy Economics in its journal The Energy Journal.

Volume (Year): Volume 28 (2007)
Issue (Month): Number 2 ()
Pages: 131-150

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Handle: RePEc:aen:journl:2007v28-02-a06

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Cited by:
  1. Paul L. Joskow, 2012. "Creating a Smarter U.S. Electricity Grid," Journal of Economic Perspectives, American Economic Association, vol. 26(1), pages 29-48, Winter.
  2. Severin Borenstein, 2007. "Customer Risk from Real-Time Retail Electricity Pricing: Bill Volatility and Hedgability," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 111-130.
  3. Allcott, Hunt, 2011. "Rethinking real-time electricity pricing," Resource and Energy Economics, Elsevier, vol. 33(4), pages 820-842.
  4. S. Borenstein, 2013. "Effective and Equitable Adoption of Opt-In Residential Dynamic Electricity Pricing," Review of Industrial Organization, Springer, vol. 42(2), pages 127-160, March.
  5. Kopsakangas Savolainen, Maria & Svento, Rauli, 2012. "Real-Time Pricing in the Nordic Power markets," Energy Economics, Elsevier, vol. 34(4), pages 1131-1142.
  6. Paul L. Joskow & Catherine D. Wolfram, 2012. "Dynamic Pricing of Electricity," American Economic Review, American Economic Association, vol. 102(3), pages 381-85, May.

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