Rethinking Real Time Electricity Pricing
Most US consumers are charged a near-constant retail price for electricity, despite substantial hourly variation in the wholesale market price. This paper evaluates the first program to expose residential consumers to hourly real time pricing (RTP). I find that enrolled households are statistically significantly price elastic and that consumers responded by conserving energy during peak hours, but remarkably did not increase average consumption during off-peak times. Welfare analysis suggests that program households were not sufficiently price elastic to generate efficiency gains that substantially outweigh the estimated costs of the advanced electricity meters required to observe hourly consumption. Although in electricity pricing, congestion pricing, and many other settings, economists’ intuition is that prices should be aligned with marginal costs, residential RTP may provide an important real-world example of a situation where this is not currently welfare-enhancing given contracting or information costs.
Keywords: Real time electricity pricing, energy demand, randomized Öeld experiments
JEL Codes: C93, L51, L94, Q41.