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Wealth Transfers Among Large Customers from Implementing Real-Time Retail Electricity Pricing

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 sample of 1142 large industrial and commercial customers in northern 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 up to 45%; even under the more extreme price volatility scenario that I examine, 90% of customers would see changes of between a 4% bill reduction and an 8% 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 examine possible �two-part RTP� programs, which allow customers to purchase a baseline quantity at regulated TOU rates, and show they can be used to greatly reduce the transfers associated with adoption of RTP.

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Energy Specializations: Energy Modeling – Energy Data, Modeling, and Policy Analysis; Electricity – Markets and Prices

JEL Codes:
E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
D42 - Market Structure, Pricing, and Design: Monopoly

Keywords: Real-time electricity pricing (RTP), Wealth transfers, volatility, California

DOI: 10.5547/ISSN0195-6574-EJ-Vol28-No2-6

Published in Volume 28, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.