22 Pages Posted: 21 Sep 2016 Last revised: 15 Oct 2016
Date Written: October 13, 2016
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: 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