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Is Mandating "Smart Meters" Smart?

The advent of "smart meters" will make possible Real Time Pricing (RTP) of electricity: customers will face and react to wholesale spot prices, thus consumption of electric power will be aligned with its opportunity cost. This article determines the marginal value of a fraction of demand (or a consumer) switching to RTP, conditional on smart meters installation. First, it establishes sufficient conditions for the marginal value of RTP to be decreasing as the fraction of customers on RTP increases. Second, it derives this marginal value for a simple yet realistic specification of demand. Finally, using data from the French power market, it estimates that, for the vast majority of residential customers whose peak demand is lower than 6 kVA, the net surplus from switching to RTP is lower than 1 €/year for low demand elasticity, 4 €/year for high demand elasticity. This finding casts a doubt on the economic value of rolling out smart meters to all residential customers, for both policy makers and power suppliers.

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Energy Specializations: Electricity; Electricity – Transmission and Network Management; Electricity – Markets and Prices ; Electricity – Generation Technologies

JEL Codes: Q41: Energy: Demand and Supply; Prices, Q40: Energy: General, D12: Consumer Economics: Empirical Analysis, D24: Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity, D81: Criteria for Decision-Making under Risk and Uncertainty, D11: Consumer Economics: Theory, Q54: Climate; Natural Disasters and Their Management; Global Warming

Keywords: Electric power markets, Demand response, Smart grid

DOI: 10.5547/01956574.35.4.6

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Published in Volume 35, Number 4 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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