Wealth Transfers from Implementing Real-Time Retail Electricity Pricing / Severin Borenstein.

By:

Borenstein, Severin

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w11594.Publication details: Cambridge, Mass. National Bureau of Economic Research 2005.Description: 1 online resource: illustrations (black and white)Subject(s):

L9 - Industry Studies: Transportation and Utilities

Online resources:

Available additional physical forms:

Hardcopy version available to institutional subscribers

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.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w11594 (Browse shelf(Opens below))	Not For Loan

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September 2005.

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.