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A new approach to congestion pricing in electricity markets: Improving user pays pricing incentives

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  • Nelson, Tim
  • Orton, Fiona

Abstract

Electricity pricing has traditionally been based on average cost pricing where consumers pay a ‘flat’ tariff based upon the average cost of production and transportation of electricity. The introduction of new ‘smart’ meters allows electricity providers to differentiate tariffs on the basis of time. Utilising congestion pricing theory, the energy industry has embraced ‘time-of-use’ (ToU) tariffs with a view to more efficiently pricing electricity. This paper demonstrates that pricing as a function of demand variability (reflecting capacity utilisation) is a more appropriate alternative to existing ToU tariffs for more efficiently allocating costs to end users. We call this new alternative pricing model ‘first derivative ratio’ FDR pricing. This new approach to congestion pricing could be applied to markets other than electricity, such as road transportation.

Suggested Citation

  • Nelson, Tim & Orton, Fiona, 2013. "A new approach to congestion pricing in electricity markets: Improving user pays pricing incentives," Energy Economics, Elsevier, vol. 40(C), pages 1-7.
    • Handle: RePEc:eee:eneeco:v:40:y:2013:i:c:p:1-7
    DOI: 10.1016/j.eneco.2013.06.005
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    References listed on IDEAS

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    1. Honebein, Peter C., 2010. "We Got a New Digital Electric Meter. Our Usage Went Up 123%. Our Bill Went Up 65%," The Electricity Journal, Elsevier, vol. 23(2), pages 76-82, March.
    2. Tim Nelson & Simon Kelley & Fiona Orton & Paul Simshauser, 2010. "Delayed Carbon Policy Certainty and Electricity Prices in Australia," Economic Papers, The Economic Society of Australia, vol. 29(4), pages 446-465, December.
    3. Robin Lindsey, 2006. "Do Economists Reach A Conclusion on Road Pricing? The Intellectual History of an Idea," Econ Journal Watch, Econ Journal Watch, vol. 3(2), pages 292-379, May.
    4. Faruqui, Ahmad & Hledik, Ryan & Sergici, Sanem, 2010. "Piloting the Smart Grid," The Electricity Journal, Elsevier, vol. 22(7), pages 55-69, August.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Dong, Jun & Jiang, Yuzheng & Liu, Dongran & Dou, Xihao & Liu, Yao & Peng, Shicheng, 2022. "Promoting dynamic pricing implementation considering policy incentives and electricity retailers’ behaviors: An evolutionary game model based on prospect theory," Energy Policy, Elsevier, vol. 167(C).
    2. Simshauser, Paul, 2018. "Price discrimination and the modes of failure in deregulated retail electricity markets," Energy Economics, Elsevier, vol. 75(C), pages 54-70.
    3. Tim Nelson, 2017. "Redesigning a 20th century regulatory framework to deliver 21st century energy technology," Journal of Bioeconomics, Springer, vol. 19(1), pages 147-164, April.
    4. Simshauser, Paul & Akimov, Alexandr, 2019. "Regulated electricity networks, investment mistakes in retrospect and stranded assets under uncertainty," Energy Economics, Elsevier, vol. 81(C), pages 117-133.
    5. Yang, Changhui & Meng, Chen & Zhou, Kaile, 2018. "Residential electricity pricing in China: The context of price-based demand response," Renewable and Sustainable Energy Reviews, Elsevier, vol. 81(P2), pages 2870-2878.
    6. Simshauser, Paul, 2016. "Distribution network prices and solar PV: Resolving rate instability and wealth transfers through demand tariffs," Energy Economics, Elsevier, vol. 54(C), pages 108-122.
    7. Rajendran, Suchithra & Srinivas, Sharan, 2020. "Air taxi service for urban mobility: A critical review of recent developments, future challenges, and opportunities," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 143(C).
    8. Paul Simshauser and David Downer, 2016. "On the Inequity of Flat-rate Electricity Tariffs," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    9. Simshauser, Paul, 2017. "Monopoly regulation, discontinuity & stranded assets," Energy Economics, Elsevier, vol. 66(C), pages 384-398.
    10. Zhou, Kaile & Yang, Shanlin & Shao, Zhen, 2016. "Energy Internet: The business perspective," Applied Energy, Elsevier, vol. 178(C), pages 212-222.
    11. Michael Maphosa, 2018. "The User Pays's Principle and the Electricity Sector: A South African Case," Journal of Economics and Behavioral Studies, AMH International, vol. 10(5), pages 51-58.

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    More about this item

    Keywords

    Electricity pricing; Time-of-use pricing; Congestion pricing;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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