Working Paper: NBER ID: w11594
Authors: Severin Borenstein
Abstract: Adoption of real-time electricity pricing — retail prices that vary hourly to reflect changing wholesale prices — removes existing cross-subsidies to those customers that consume disproportionately more when wholesale prices are highest. If their losses are substantial, these customers are likely to oppose RTP initiatives unless there is a supplemental program to offset their loss. Using data on a random sample of 636 industrial and commercial customers in southern California, I show that RTP adoption would result in significant transfers compared to a flat-rate tariff. When compared to the time-of-use rates (simple peak/offpeak tariffs) that these customers already face, however, the transfers drop by nearly half; even under the more extreme price volatility scenario that I examine, 90% of customers would see changes of between a 9% bill reduction and a 14% bill increase. Though customer price responsiveness reduces the loss incurred by those with high-cost demand profiles, I also demonstrate that this offsetting effect is unlikely to be large enough for most customers with costly demand patterns to completely offset their lost cross-subsidy. The analysis suggests that adoption of real-time pricing may be difficult without a supplemental program that compensates the customers who are made worse off by the change. I discuss how "two-part RTP" programs, which allow customers to purchase a baseline quantity at regulated TOU rates, can reduce the transfers associated with adoption of RTP.
Keywords: No keywords provided
JEL Codes: L9
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| RTP adoption (R50) | significant wealth transfers (D14) |
| RTP adoption (R50) | changes in customer bills (L97) |
| high wholesale prices (D49) | increased consumption by large customers (E20) |
| increased consumption by large customers (E20) | wealth transfers (H24) |
| price responsiveness (D40) | reduce losses (G33) |
| loss of cross-subsidies (H23) | substantial losses for customers (G33) |
| substantial losses for customers (G33) | opposition to RTP adoption (L49) |