Wealth Transfers from Implementing Real-Time Retail Electricity Pricing

Severin Borenstein

NBER Working Paper No. 11594
Issued in September 2005
NBER Program(s):   IO   EEE

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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Document Object Identifier (DOI): 10.3386/w11594

Published: Borenstein, Severin. "The Long-Run Efficiency Of Real-Time Electricity Pricing," Energy Journal, v26(3), 2005, 93-116.

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