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Effective and Equitable Adoption of Opt-In Residential Dynamic Electricity Pricing

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  • S. Borenstein

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Abstract

Time-varying retail electricity pricing is very popular with economists, but has little support among regulators and consumers. I propose an opt-in time-varying residential pricing plan that would be equitable to both customers who opt in and those who don’t. Low-income households would, on average, see almost no change in their bills under time-varying pricing, while low-consumption households would see their bills decline somewhat and high-consumption households would see their bills rise. Most importantly, I show that the opt-in approach is unlikely to increase the flat rate charged to other customers by more than a few percentage points. Copyright Springer Science+Business Media New York 2013

Suggested Citation

  • S. Borenstein, 2013. "Effective and Equitable Adoption of Opt-In Residential Dynamic Electricity Pricing," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 42(2), pages 127-160, March.
  • Handle: RePEc:kap:revind:v:42:y:2013:i:2:p:127-160
    DOI: 10.1007/s11151-012-9367-3
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    References listed on IDEAS

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    1. Severin Borenstein & Stephen Holland, 2005. "On the Efficiency of Competitive Electricity Markets with Time-Invariant Retail Prices," RAND Journal of Economics, The RAND Corporation, vol. 36(3), pages 469-493, Autumn.
    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. Faruqui, Ahmad & George, Stephen, 2005. "Quantifying Customer Response to Dynamic Pricing," The Electricity Journal, Elsevier, vol. 18(4), pages 53-63, May.
    4. Severin Borenstein, 2012. "The Redistributional Impact of Nonlinear Electricity Pricing," American Economic Journal: Economic Policy, American Economic Association, vol. 4(3), pages 56-90, August.
    5. Kahn, Alfred E, 1979. "Applications of Economics to an Imperfect World," American Economic Review, American Economic Association, vol. 69(2), pages 1-13, May.
    6. Severin Borenstein, 2007. "Wealth Transfers Among Large Customers from Implementing Real-Time Retail Electricity Pricing," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 131-150.
    7. Herter, Karen & McAuliffe, Patrick & Rosenfeld, Arthur, 2007. "An exploratory analysis of California residential customer response to critical peak pricing of electricity," Energy, Elsevier, vol. 32(1), pages 25-34.
    8. Severin Borenstein, 2002. "The Trouble With Electricity Markets: Understanding California's Restructuring Disaster," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 191-211, Winter.
    9. Koichiro Ito, 2014. "Do Consumers Respond to Marginal or Average Price? Evidence from Nonlinear Electricity Pricing," American Economic Review, American Economic Association, vol. 104(2), pages 537-563, February.
    10. Severin Borenstein, 2005. "The Long-Run Efficiency of Real-Time Electricity Pricing," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 93-116.
    11. Alexander, Barbara R., 2010. "Dynamic Pricing? Not So Fast! A Residential Consumer Perspective," The Electricity Journal, Elsevier, vol. 23(6), pages 39-49, July.
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    Cited by:

    1. Christian Gambardella & Michael Pahle & Wolf-Peter Schill, 2016. "Do Benefits from Dynamic Tariffing Rise? Welfare Effects of Real-Time Pricing under Carbon-Tax-Induced Variable Renewable Energy Supply," Discussion Papers of DIW Berlin 1621, DIW Berlin, German Institute for Economic Research.
    2. Gong, Chengzhu & Tang, Kai & Zhu, Kejun & Hailu, Atakelty, 2016. "An optimal time-of-use pricing for urban gas: A study with a multi-agent evolutionary game-theoretic perspective," Applied Energy, Elsevier, vol. 163(C), pages 283-294.
    3. Kaicker, Nidhi & Dutta, Goutam & Das, Debamanyu & Banerjee, Subhashree, 2017. "Mathematical Modelling for Time-of-Use Pricing of Electricity in Monopoly and Oligopoly," IIMA Working Papers WP 2017-10-01, Indian Institute of Management Ahmedabad, Research and Publication Department.
    4. Katrina Jessoe & David Rapson, 2015. "Commercial and Industrial Demand Response Under Mandatory Time-of-Use Electricity Pricing," Journal of Industrial Economics, Wiley Blackwell, vol. 63(3), pages 397-421, September.
    5. Koichiro Ito, 2015. "Asymmetric Incentives in Subsidies: Evidence from a Large-Scale Electricity Rebate Program," American Economic Journal: Economic Policy, American Economic Association, vol. 7(3), pages 209-237, August.
    6. Shira Horowitz and Lester Lave, 2014. "Equity in Residential Electricity Pricing," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    7. Yumi Yoshida & Kenta Tanaka & Shunsuke Managi, 2017. "Which dynamic pricing rule is most preferred by consumers?—Application of choice experiment," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 6(1), pages 1-11, December.
    8. Simshauser, Paul & Whish-Wilson, Patrick, 2017. "Price discrimination in Australia's retail electricity markets: An analysis of Victoria & Southeast Queensland," Energy Economics, Elsevier, vol. 62(C), pages 92-103.
    9. John A. List & Robert D. Metcalfe & Michael K. Price & Florian Rundhammer, 2017. "Harnessing Policy Complementarities to Conserve Energy: Evidence from a Natural Field Experiment," Experimental Economics Center Working Paper Series 2017-05, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.
    10. 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).
    11. repec:bla:ecaffa:v:37:y:2017:i:1:p:85-101 is not listed on IDEAS
    12. Kirkerud, Jon Gustav & Trømborg, Erik & Bolkesjø, Torjus Folsland, 2016. "Impacts of electricity grid tariffs on flexible use of electricity to heat generation," Energy, Elsevier, vol. 115(P3), pages 1679-1687.
    13. De Castro, Luciano & Dutra, Joisa, 2013. "Paying for the smart grid," Energy Economics, Elsevier, vol. 40(S1), pages 74-84.
    14. repec:pal:jorsoc:v:68:y:2017:i:10:d:10.1057_s41274-016-0149-4 is not listed on IDEAS
    15. Carlo Stagnaro, 2016. "Concorrenza e innovazione nei mercati retail dell energia elettrica. Le prospettive dopo il Ddl Concorrenza 2015," Note di discussione - MISE Working Papers mise-1, MISE - Ministero dello Sviluppo Economico.
    16. Yalcintas, Melek & Hagen, William T. & Kaya, Abidin, 2015. "Time-based electricity pricing for large-volume customers: A comparison of two buildings under tariff alternatives," Utilities Policy, Elsevier, vol. 37(C), pages 58-68.
    17. 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.
    18. Claire Bergaentzlé, 2013. "From smart technology to smart consumers: for better system reliability and improved market efficiency," Post-Print halshs-01011169, HAL.

    More about this item

    Keywords

    Real-time pricing; Critical-peak pricing; Tariff design;

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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