Household Response to Dynamic Pricing of Electricity - A Survey of the Experimental Evidence

Abstract:     
Since the energy crisis of 2000-2001 in the western United States, much attention has been given to boosting demand response in electricity markets. One of the best ways to let that happen is to pass through wholesale energy costs to retail customers. This can be accomplished by letting retail prices vary dynamically, either entirely or partly. For the overwhelming majority of customers, that requires a changeout of the metering infrastructure, which may cost as much as $40 billion for the US as a whole. While a good portion of this investment can be covered by savings in distribution system costs, about 40 percent may remain uncovered. This investment gap could be covered by reductions in power generation costs that could be brought about through demand response. Thus, state regulators in many states are investigating whether customers will respond to the higher prices by lowering demand and if so, by how much.

To help inform this assessment, we survey the evidence from the 15 most recent experiments with dynamic pricing of electricity. We find conclusive evidence that households (residential customers) respond to higher prices by lowering usage. The magnitude of price response depends on several factors, such as the magnitude of the price increase, the presence of central air conditioning and the availability of enabling technologies such as two-way programmable communicating thermostats and always-on gateway systems that allow multiple end-uses to be controlled remotely. Across the range of experiments studied, time-of-use rates induce a drop in peak demand that ranges between three to six percent and critical-peak pricing tariffs induce a drop in peak demand that ranges between 13 to 20 percent. When accompanied with enabling technologies, the latter set of tariffs lead to a drop in peak demand in the 27 to 44 percent range.

Working Paper Series