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Behavioral Considerations for Effective Time-Varying Electricity Prices

22 Pages Posted: 21 Sep 2016 Last revised: 15 Oct 2016

Ian Schneider

Massachusetts Institute of Technology (MIT)

Cass R. Sunstein

Harvard Law School; Harvard University - Harvard Kennedy School (HKS)

Date Written: October 13, 2016

Abstract

Wholesale prices for electricity vary significantly due to high fluctuations and low elasticity in short-run demand. End-use customers have typically paid flat retail rates for their electricity consumption, and time-varying prices have been proposed to help reduce peak consumption and lower the overall cost of servicing demand. Unfortunately, the general practice is an opt-in system: a default rule in favor of time-varying prices would be far better. A behaviorally informed analysis also shows that when transaction costs and decision biases are taken into account, the most cost-reflective policies are not necessarily the most efficient. On reasonable assumptions, real-time prices can result in less peak conservation of manually controlled devices than time-of-use or critical-peak prices. For that reason, the trade-offs between engaging automated and manually controlled loads must be carefully considered in time-varying rate design. The rate type and accompanying program details should be designed with the behavioral biases of consumers in mind, while minimizing price distortions for automated devices.

Keywords: default rules, inattention, real-time pricing, electricity rates, automated devices, smart home

Suggested Citation

Schneider, Ian and Sunstein, Cass R., Behavioral Considerations for Effective Time-Varying Electricity Prices (October 13, 2016). Available at SSRN: https://ssrn.com/abstract=2841049

Ian Schneider (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Cass R. Sunstein

Harvard Law School ( email )

1575 Massachusetts Ave
Areeda Hall 225
Cambridge, MA 02138
United States
617-496-2291 (Phone)

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

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