TY - JOUR

T1 - Inducing flexibility of household electricity demand

T2 - The overlooked costs of reacting to dynamic incentives

AU - Bejan, Ioana

AU - Jensen, Carsten Lynge

AU - Andersen, Laura M.

AU - Hansen, Lars Gårn

PY - 2021

Y1 - 2021

N2 - Flexible electricity demand through dynamic pricing1 is becoming more critical for net-balancing as the share of intermittent wind and solar electricity production increases. However, people are prone to habits and regularity, so this kind of dynamic pricing schemes may also impose a greater cost of reacting to price incentives. In a randomized field experiment we compare the household consumer welfare effects of reacting to dynamic electricity price incentives to those of reacting to time of use incentives. We utilized smart-metered hourly electricity consumption data to unobtrusively measure treatment effects. We found that a dynamic incentive of 1 DKK/kWh induced an average change in electricity consumption per household of 0.182 kWh during the 3-hour target period. The corresponding time of use incentive induced an average change in electricity consumption of 0.351 kWh. This implies that dynamic incentives reduce consumer surplus from reacting by half, compared to reacting to corresponding time of use incentives and therefore that households derive a substantial welfare benefit from the regularity and predictability provided by time of use pricing. This suggests that the tariff structure that optimally balances demand flexibility and the associated consumer welfare costs is likely a combination of time of use and dynamic pricing incentives.

AB - Flexible electricity demand through dynamic pricing1 is becoming more critical for net-balancing as the share of intermittent wind and solar electricity production increases. However, people are prone to habits and regularity, so this kind of dynamic pricing schemes may also impose a greater cost of reacting to price incentives. In a randomized field experiment we compare the household consumer welfare effects of reacting to dynamic electricity price incentives to those of reacting to time of use incentives. We utilized smart-metered hourly electricity consumption data to unobtrusively measure treatment effects. We found that a dynamic incentive of 1 DKK/kWh induced an average change in electricity consumption per household of 0.182 kWh during the 3-hour target period. The corresponding time of use incentive induced an average change in electricity consumption of 0.351 kWh. This implies that dynamic incentives reduce consumer surplus from reacting by half, compared to reacting to corresponding time of use incentives and therefore that households derive a substantial welfare benefit from the regularity and predictability provided by time of use pricing. This suggests that the tariff structure that optimally balances demand flexibility and the associated consumer welfare costs is likely a combination of time of use and dynamic pricing incentives.

KW - Dynamic electricity pricing

KW - Field experiment

KW - Household cost of reacting

KW - Integrating sustainable energy sources

KW - Time of use electricity pricing

U2 - 10.1016/j.apenergy.2020.116283

DO - 10.1016/j.apenergy.2020.116283

M3 - Journal article

AN - SCOPUS:85099530332

VL - 284

JO - Applied Energy

JF - Applied Energy

SN - 0306-2619

M1 - 116283

ER -