Paper An Analysis of Time-Based Pricing in Retail Electricity Markets
Problem Definition: We empirically evaluate the short-term effects of time-based tariffs on the electricity demand, consumer welfare, retailers and the environment. Academic / Practical Relevance: Electricity retailers around the world have been introducing time-based pricing programs. We study the short-term impact of such tariffs empirically. Methodology: We build a structural estimation model of household electricity demand and analyze a data set from an Irish field experiment, consisting of the half-hourly electricity consumption of over three thousand households, combined with the wholesale price, system load and generation data. Using the estimates from the structural model, we conduct a counterfactual study to explore various questions of practical importance. Results: Our empirical analysis reveals that focusing on the peak-load reduction metric, one can design a flexible time-of-use (TOU) tariff that is simple and predictable yet performs as well as real-time pricing (RTP) given a fixed time horizon for evaluation. The annual electricity bills of consumers decrease only slightly when they switch from the flat rate to time-based tariffs, but there can be significant volatility in month to month bills under time-based tariffs. In contrast, the more flexible a tariff in terms of pricing, the less volatility it creates in retailer's profits throughout the year. Finally, switching from the flat rate to time-based tariffs would not change CO2 emissions from electricity generation in Ireland significantly. Managerial Implications: We find that time-based tariffs are effective in peak load reduction. However, the most appropriate time-based tariff depends on the context. If the goal is mitigating demand spikes over very short time spans, e.g. hours, then RTP is the most effective one. If the performance-relevant time horizon is longer, e.g. a month or a season, then a carefully designed TOU tariff with pre-determined rates can be just as effective as RTP. Consumers and retailers are largely unaffected by time-based tariffs which suggests that their adoption may be harder under opt-in policies, compared to opt-out policies. From an environmental perspective, our result that CO2 emissions do not increase facilitates the adoption of time-based tariffs.
Published in: M&SOM
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