The Efficiency of Electricity Pricing Schemes
Electricity consumers typically pay the same (or a similar) retail price for electricity regardless of when they consume it. The theoretically ideal pricing scheme would be real-time pricing, in which the price of electricity charged to the consumer is unconstrained and adjusts at a high frequency to reflect costs. While technologically feasible, real-time electricity prices have met with considerable resistance from utilities and regulators, who fear that consumers will complain about price surges and unpredictable bills.
As a result, pricing reforms have been incremental. Instead of real-time pricing, utilities have experimented with peak pricing for certain times of the day, seasonal rates, or peak prices only on certain days on which demand is forecasted to be very high because of weather. Importantly, the rates are pre-announced and do not perfectly track wholesale price movements. This study explores whether most of the efficiency gains from real-time pricing can be achieved by these intermediate policies. If temporally and geographically differentiated rate designs can capture most of the efficiency gains of real-time pricing, then this may present a useful way forward for the industry that can accelerate reform.
Grant Result
Consumer prices for electricity do not align with generation cost, causing inefficient consumer behavior. Simple time-of-use rates and limited critical-peak pricing can each correct around 10% of this mispricing, but complex rates often backfire.
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Arthur van Benthem
Associate Professor of Business Economics and Public PolicyArthur van Benthem is an expert in environmental and energy economics, exploring the economic efficiency of energy policy. He is a faculty fellow at the Kleinman Center and an associate professor of Business Economics and Public Policy at Wharton.
