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Behavioral considerations for effective time-varying electricity prices

Published online by Cambridge University Press:  06 October 2017

IAN SCHNEIDER  and
CASS R. SUNSTEIN
IAN SCHNEIDER*
Affiliation:
Institute for Data, Systems, and Society, MIT, Cambridge, MA, USA
CASS R. SUNSTEIN
Affiliation:
Harvard University, Cambridge, MA, USA
*
*Correspondence to: Institute for Data, Systems, and Society, MIT, Cambridge, MA, USA. Email: [email protected]
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Abstract

Wholesale prices for electricity vary significantly due to high fluctuations and low elasticity of short-run demand. End-use customers have typically paid flat retail rates for their electricity consumption, and time-varying prices (TVPs) 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 TVPs 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.

Type
Articles
Information
Behavioural Public Policy , Volume 1 , Issue 2 , November 2017 , pp. 219 - 251
Copyright
Copyright © Cambridge University Press 2017 

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