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Electricity Retail Rate Design in a Decarbonized Economy: An Analysis of Time-Of-Use and Critical Peak Pricing

Author

Listed:
  • Tim Schittekatte
  • Dharik S. Mallapragada
  • Paul L. Joskow
  • Richard Schmalensee

Abstract

Currently, most U.S. electricity consumers pay a constant price per kWh consumed that accounts for most of their bill. Ongoing developments in the power system increase efficiency gains that can be made from exposing consumers to widely varying wholesale spot prices. Pure spot pricing is not popular; consumers (and politicians) value price predictability and bill stability. We focus on second-best alternatives: time-of-use (TOU) and critical peak pricing (CPP). We introduce alternative assessment criteria tailored to a context with increasing intraday shiftable loads. Using historical data from CAISO, ERCOT and ISO-NE, we find that out-of-sample daily Spearman rank correlations between TOU rates and spot prices can be relatively high (averaging 0.7-0.8), and simulations confirm that TOU rates can reasonably replicate efficient load-shifting incentives (up to 60-70% of the potential). Our analysis suggests that TOU rates, especially when complemented with CPP, can be considerably more socially valuable than previously estimated.

Suggested Citation

  • Tim Schittekatte & Dharik S. Mallapragada & Paul L. Joskow & Richard Schmalensee, 2022. "Electricity Retail Rate Design in a Decarbonized Economy: An Analysis of Time-Of-Use and Critical Peak Pricing," NBER Working Papers 30560, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:30560
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    Cited by:

    1. López Prol, Javier & Paul, Arijit, 2024. "Profitability landscapes for competitive photovoltaic self-consumption," Energy Policy, Elsevier, vol. 188(C).
    2. Khorramfar, Rahman & Mallapragada, Dharik & Amin, Saurabh, 2024. "Electric-gas infrastructure planning for deep decarbonization of energy systems," Applied Energy, Elsevier, vol. 354(PA).
    3. Enrich, Jacint & Li, Ruoyi & Mizrahi, Alejandro & Reguant, Mar, 2024. "Measuring the impact of time-of-use pricing on electricity consumption: Evidence from Spain," Journal of Environmental Economics and Management, Elsevier, vol. 123(C).
    4. Lang, Corey & Qiu, Yueming (Lucy) & Dong, Luran, 2023. "Increasing voluntary enrollment in time-of-use electricity rates: Findings from a survey experiment," Energy Policy, Elsevier, vol. 173(C).
    5. Cabot, Clément & Villavicencio, Manuel, 2024. "Second-best electricity pricing in France: Effectiveness of existing rates in evolving power markets," Energy Economics, Elsevier, vol. 136(C).
    6. Silvana Tiedemann & Raffaele Sgarlato & Lion Hirth, 2023. "Price elasticity of electricity demand: Using instrumental variable regressions to address endogeneity and autocorrelation of high-frequency time series," Papers 2306.12863, arXiv.org.

    More about this item

    JEL classification:

    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L97 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Utilities: General
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

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