Cost-reflective electricity pricing: Consumer preferences and perceptions

In Australia, residential electricity peak demand has risen steeply in recent decades, leading to higher prices as new infrastructure was needed to satisfy demand. One way of limiting further infrastructure-induced retail price rises is via ‘cost-reflective’ electricity network pricing that incentivises users to shift their demand to non-peak periods. Empowering consumers with knowledge of their energy usage is critical to maximise the potential benefits of cost-reflective pricing. This research consulted residential electricity consumers in three Australian states on their perceptions and acceptance of two cost-reflective pricing scenarios (Time-of-Use and Peak Capacity pricing) and associated technologies to support such pricing (smart meters, in-home displays and direct load control devices). An energy economist presented information to focus groups on the merits and limitations of each scenario, and participants’ views were captured. Almost half of the 53 participants were agreeable to Time-of-Use pricing, but did not have a clear preference for Peak Capacity pricing, where the price was based on the daily maximum demand. Participants recommended further information to both understand and justify the potential benefits, and for technologies to be introduced to enhance the pricing options. The results have implications for utilities and providers who seek to reduce peak demand.     

Nodal pricing in Ontario,Canada: Implications for solar PV electricity

This article investigates the extent to which the value of solar electricity (that is, electricity generated by photovoltaics), a form of distributed generation, would be higher under a nodal pricing system as compared to a uniform pricing system. More specifically, solar radiation and electricity market data for the period 1 January 2005–31 December 2006 are examined for locations near Mississauga, Ontario and Kingston, Ontario. The hybrid optimization model for electric renewables (HOMER) program is used for the simulation of solar electricity output. For Mississauga, the average monthly value of the solar electricity based on Ontario's uniform pricing system (the hourly Ontario energy price, or HOEP) was C$20.62. Based on nodal pricing, the average monthly value was C$27.20 per month (32% higher). For Kingston, the average monthly value of the solar electricity based on HOEP was C$23.78 per month. Based on nodal pricing, the average monthly value was C$36.03 (52% higher). Over the two-year period, the monthly differences were greatest during the summer, with a 53% spread in June in Mississauga and a 106% spread in May in Kingston. As debates regarding electricity futures progress, the importance of proper valuation of alternative generation sources continues to be critical. This research aims to contribute to discussions regarding the extent to which a nodal pricing system could facilitate the contribution of solar electricity to a sustainable electricity system in Ontario.     

Price discrimination in Australia's retail electricity markets: An analysis of Victoria & Southeast Queensland

When capital-intensive monopoly industries are restructured and deregulated, consumer prices commence a natural drift from regulated uniform ‘average cost’ tariffs to competitive differential prices, and this can raise problems for policymakers. Deep discounts are welcomed, high Standing Offers are not. But price discrimination is unremarkable in economics. Indeed, in industries where fixed & sunk costs represent a significant portion of total cost, discriminatory pricing is usually welfare enhancing. Conversely, theory predicts and empirical evidence confirms that regulatory efforts to cherry-pick differential prices in asymmetric markets will damage consumer welfare. In this article, we analyse differential retail electricity offer prices in the Australian States of Victoria and Queensland and contrast these with industry average total cost and the marginal cost of retail supply. We find deregulated Victoria displays high price dispersion with Standing Offer tariffs 10% above industry average total cost and marginal offers at break-even prices (i.e. 20% below average total cost). In the semi-regulated Southeast Queensland market where a regulated price-cap exists, there is lower dispersion but marginal offers include a 6.7% retail mark-up. Efficient pricing requires the marginal unit produced to be priced at marginal cost and Victoria meets this criteria – but we identify an episode of inter-consumer misallocation due to high Standing Offers. We conclude policy initiatives designed to help firms shift vulnerable households from Standing Offer tariffs is desirable.     

Demand response with locational dynamic pricing to support the integration of renewables

Electricity production from centralised and decentralised renewable energy resources in Europe is gaining significance, resulting in operational challenges in the electricity system. Although these challenges add to the locational and time dependency of the underlying cost of operating the system, this variability in time and location is not reflected in residential tariff schemes. Consequently, residential users are not incentivised to react to varying system conditions and to help the integration of renewable energy resources. Therefore, this paper provides a theoretical framework for designing a locational dynamic pricing scheme. This can be used to assess existing tariff structures for consumption and injection, and can serve as a theoretical background for developing new tariff schemes. Starting from the underlying costs, this paper shows that the potential for locational dynamic pricing depends on the locational and time dependency of its cost drivers. When converting costs into tariffs, the tariff design should be determined. This includes the advance notice of sending tariffs to users, and the length of price blocks and price patterns. This tariff design should find a balance between tariff principles related to costs, practicality and social acceptability on the one hand, and the resulting demand response incentive on the other.     

Aumann-Shapley transmission congestion pricing

This paper describes a methodology for congestion cost allocation based on marginal costs and game-theoretic principles (Aumann-Shapley pricing). The methodology provides fair, economically efficient prices and ensures that the revenue collected from the transmission users will be equal to the cost of relieving the congestion     

Information technology and efficient pricing Providing a competitive edge for electric utilities

Electricity has traditionally been generated and sold as a homogeneous commodity with a single price. This practice has less to do with the nature of electricity than with the lack of technology to distinguish among each kilwatthour based on what- and when - it is used. This article argues that with the recent advances in information and communication technologies, the time has arrived to market electricity as something other than a homogeneous commodity. By pricing electricity according to its time-of-use, for example, electricity will be more efficiently utilized, benefitting both the customers and the electric companies.     

The effects of electricity pricing on PHEV competitiveness

Plug-in hybrid electric vehicles (PHEVs) will soon start to be introduced into the transportation sector, thereby raising a host of issues related to their use, adoption and effects on the electricity sector. Their introduction has the potential to significantly reduce carbon emissions from the transportation sector, which has led to government policies aimed at easing their introduction. If their widespread adoption is set as a target it is imperative to consider the effects of existing policies that may increase or decrease their adoption rate. In this study, we present a micro level electricity demand model that can gauge the effects of PHEVs on household electricity consumption and the subsequent economic attractiveness of the vehicles. We show that the electricity pricing policy available to the consumer is a very significant factor in the economic competitiveness of PHEVs. Further analysis shows that the increasing tier electricity pricing system used in California will substantially blunt adoption of PHEVs in the state; and time of use electricity pricing will render PHEVs more economically attractive in any state.     

Short- and long-run marginal cost pricing: On their alleged equivalence

The equivalence between short-run marginal cost (SRMC) and long-run marginal cost (LRMC) in a fully adjusted equilibrium has been proved over and over again. In the literature dealing with public utility pricing, this basic result has been taken to imply that it is optimal to set prices at LRMC. Important contributions to this literature are reviewed in this paper. The equivalence, however, is valid only under the very restrictive assumption that the capacity can be varied continuously. This means that indivisibilities, irreversibilities and durability of investments are ignored. Where such phenomena exist, as in electricity production and distribution, pricing according to LRMC is neither theoretically valid nor applicable. It is not surprising that it has been difficult for public utilities to define the LRMC concept operationally; average cost concepts are used as ‘approximations’. Under these circumstances we find it advisable to dispense with the LRMC concept altogether and rely on pricing based on SRMC.     

Residential implementation of critical-peak pricing of electricity

This paper investigates how critical-peak pricing (CPP) affects households with different usage and income levels, with the goal of informing policy makers who are considering the implementation of CPP tariffs in the residential sector. Using a subset of data from the California Statewide Pricing Pilot of 2003–04, average load change during summer events, annual percent bill change, and post-experiment satisfaction ratings are calculated across six customer segments, categorized by historical usage and income levels. Findings show that high-use customers respond significantly more in kW reduction than do low-use customers, while low-use customers save significantly more in percentage reduction of annual electricity bills than do high-use customers—results that challenge the strategy of targeting only high-use customers for CPP tariffs. Across income levels, average load and bill changes were statistically indistinguishable, as were satisfaction rates—results that are compatible with a strategy of full-scale implementation of CPP rates in the residential sector. Finally, the high-use customers earning less than $50,000 annually were the most likely of the groups to see bill increases—about 5% saw bill increases of 10% or more—suggesting that any residential CPP implementation might consider targeting this customer group for increased energy efficiency efforts.     

Electricity tariffs in Sweden

Electricity tariffs in Sweden are analysed on the basis of the theory of public utility pricing. The coordinated pricing system used among power producers in the Nordic countries is found to be an almost ideal application of this theory. The power industry is criticized for its current objective of maintaining stable electricity tariffs. A rough estimate related to low-voltage electricity tariffs indicates a considerable savings potential for the country of a switch from the present uniform pricing system to interval pricing based on seasonal and daytime/nighttime variations.     

Time of day pricing and the levelized cost of intermittent power generation

An important characteristic of most renewable energy sources is intermittency in their ability to generate electricity. Yet, intermittency is usually ignored in life-cycle cost calculations intended to assess the competitiveness of electric power from renewable as opposed to dispatchable energy sources, such as fossil fuels. This paper demonstrates that for intermittent renewable power sources a traditional life-cycle cost calculation should be appended by a correction factor which we term the Co-Variation coefficient. It captures any synergies, or complementarities, between the time-varying patterns of electricity generation and pricing. We estimate the Co-Variation coefficient for specific settings in the western United States. Our estimates imply that the benchmark of cost competitiveness for solar photovoltaic (PV) power is 10 to 15% lower than previous average life-cycle cost analyses have suggested. In contrast, the generation pattern of wind power exhibits complementarities with electricity pricing schedules, yielding a cost assessment that is higher than that suggested by traditional calculations. For the specific settings we study, the corresponding magnitude of the markup is 10 to 15%.     

Towards flexible energy demand – Preferences for dynamic contracts,services and emissions reductions

Households’ preferences for attributes of flexible energy demand are not well understood. This paper evaluates Finnish households’ acceptance of hypothetical contracts and services aimed at increasing demand side flexibility. We conduct a Choice Experiment to analyze households’ willingness to offer flexibility through timing their electricity usage and heating; their interest in dynamic pricing contracts such as real-time pricing, two-rate tariffs, or power-based tariffs; and how emissions reductions affect their choices. The results indicate that households’ sensitivity to restrictions in electricity usage is much stronger than their sensitivity to restrictions in heating. Households also require considerable compensation to choose real-time pricing over fixed fees. Furthermore, other value-creating elements besides monetary compensation could incentivize households to offer demand side flexibility because they value reductions in CO₂ emissions at the power system level.     

The effect of counter-trading on competition in electricity markets

In a competitive electricity market, nodal pricing is the most efficient way to manage congestion. Counter-trading is inefficient as it gives the wrong long term signals for entry and exit of power plants. However, in a non-competitive market, additional entry will improve the competitiveness of the market, and will increase social benefit by reducing price–cost margins. This paper studies whether the potential pro-competitive entry effects could make counter-trading more efficient than nodal pricing. We find that this is unlikely to be the case, and expect counter-trading to have a negative effect on overall welfare. The potential benefits of additional competition (more competitive prices and lower production cost) do not outweigh the distortions (additional investment cost for the entrant, and socialization of the congestion cost to final consumers).     

The pricing of off-peak power

Benefit-cost analysis is used to show that even with only one electricity production technique, marginal cost pricing of electricity in a firm off-peak period might reduce social welfare rather than improve it. This may occur when there are more periods with dissimilar demands for power than feasible prices for electricity. Thus the conclusion is reinforced that it may be more important to charge a higher price for electricity during periods of peak demand than a price equal to marginal running costs during the most off-peak hours.     

The importance of incorporating reliability of supply criteria in a regulatory system of electricity distribution: An empirical analysis for Austria

Grid tariffs are the main source of income for distribution system operators (DSOs). Reductions of tariffs increase the cost pressure on DSOs; assuming they work efficiently, tariff reductions potentially lead to a decrease of the electricity system's quality if no reliability of supply criteria are incorporated in the regulatory system. Our statistical analysis shows that the correlation between grid tariffs and electricity supply interruptions in a regulatory regime neglecting this incorporation is significant and that furthermore decreasing tariffs harm the reliability of supply even in the short run. Our econometric analysis of the influence of tariffs on reliability of supply shows a significant correlation between the grid tariffs and the duration of power outages in the Austrian electricity grid; an annual average interruption duration per installed capacity of a specific grid increases ceteris paribus by 1.36 min if the grid tariff of this specific grid is decreased in the previous year by 1€/MWh.     

A marginalist approach to pricing US natural gas

The current method of retail pricing for natural gas in the USA introduces serious distortions in the allocation of this scarce commodity. The cost to the consumer is, in some instances, less than half of the marginal cost of producing the gas. In this paper the author presents an alternative to the antiquated gas pricing system in use in nearly every utility in the USA. Basing rates on marginal costs would be difficult, and these difficulties are explored. The analysis results in a recommendation that there should be a gradual move from average embedded cost pricing to marginal cost pricing.     

Optimal model of congestion management in deregulated environment of power sector with promotion of renewable energy sources

In the competitive electricity market it becomes very much important to give special consideration for development of renewable energy sources (RESs) due to environmental and other social problems related with conventional generations. So this paper presents an optimal model of congestion management with special emphasis for promotion of RES in competitive electricity market. This paper presents a generalized optimal model of congestion management for deregulated power sector that dispatches the pool in combination with privately negotiated bilateral and multilateral contracts while maximizing social benefit. This model determines the locational marginal pricing (LMP) based on marginal cost theory. It also determines the size of non-firm transactions as well as pool demand and generations. Both firms as well as non-firm transactions are considered in this model. The proposed model has been applied to IEEE-30 bus test system with addition of some RES for analysis of the proposed model. The RES supplies its power to load either through the firm transaction or through power pool. The power from RES is not subjected to any curtailment in proposed model of congestion management.     

Improved efficiency in domestic electricity use

This paper describes how domestic appliances (excluding water and space heaters) and lighting devices can be redesigned to use electricity more efficiently. Three levels of conservation strategy are analysed: ‘moderate’, ‘strong’ and ‘radical’. These result in the reduction of electricity consumption to 80%, 50% and 35% respectively, without affecting the service and comfort obtained. The calculations are based on Danish behaviour patterns and appliances sold in Denmark, but the results can be transferred to other countries. The savings reported are shown to be economically attractive as well as technologically possible.     

Efficient pricing and investment in electricity markets with intermittent resources

Facing growing technological and environmental challenges, the electricity industry needs effective pricing mechanism to promote efficient risk management and investment decisions. In a restructured electricity market with competitive wholesale prices and traditionally regulated retail rates, however, there are technical and institutional barriers that prevent dynamic pricing with price responsive demand. In regions with limited energy storage capacity, intermittent renewable resources present special challenges. This could adversely affect the effectiveness of public policies causing inefficient investments in energy technologies. In this paper, we present an updated economic model of pricing and investment in restructured electricity market and use the model in a simulation study for an initial assessment of renewable energy strategy and alternative pricing mechanisms. A key objective of the study is to shed light on the policy issues so that effective decisions can be made to improve efficiency.