Under such a billing system, consumers’ electricity prices correspond to wholesale spot markets in
real-time compared to an average price in conventional contracts. “It is striking that (...) the rates of
the flat tariff always exceed that of real-time pricing,” except in cases of crisis price spikes, economists
Charles Pébereau from Stanford University and Kevin Remmy from the University of Mannheim
wrote in a recent study (see chart).
“Contrary to theoretical predictions, the retail market in New Zealand did not unravel towards wid
spread adoption of real-time pricing and, more than seven years after the introduction of real-time
pricing, less than 1.25 per cent of consumers switched to this tariff,” the authors emphasise.
They examined panel data of all residential retail switches between 2014 and 2018 and identified
barriers to widespread adoption of real-time pricing and their consequences for policies promoting
this tariff. The results matter as for instance, the European Union implemented an ‘opt-in’ policy requiring
that large retailers offer real-time pricing by 2025.
The pros and cons are as follows: On the one hand, real-time pricing increases demand response
which can help integrate intermittent renewable energy sources such as wind and solar. It improves
the efficiency of electricity markets by reducing the need to install generation capacity that is only
used a few hours each year when demand peaks and prevents producers from abusing their market
power.
On the other hand, because spot prices are uncertain and volatile, real-time pricing exposes consumers
to the risk of a crisis on electricity wholesale markets which may increase with the share of intermittent
electricity sources and by weather changes due to global warming.
“Our results suggest that price uncertainty is a serious threat to widespread adoption of real-time
pricing because when prices spike unexpectedly and remain high for several weeks, prospective
adopters forego adoption and recent adopters switch to another tariff and do not return,” Pébereau
and Remmy said.
In New Zealand, such a crisis occured for about three months in 2017 due to low hydro levels coupled
with high electricity demand driven by electric heating in winter. This crisis had a great impact on the
adoption as well as on the propensity to leave the new tariff, or attrition, the study showed.
During a crisis on the wholesale market, the trade-off between short-term losses and long-term benefits
is particularly salient to every consumer. It affects both the consumers who consider adopting
real-time pricing and those who have already adopted it because there are no fees associated with
switching to another tariff.
The study also revealed that experience with and knowledge about the billing system plays a role in
consumer’s behaviour. The share of consumers discarding real-time pricing during the winter 2017
crisis decreased with the time spent on the tariff.
What’s more, consumers rely mostly on contemporaneous spot prices to decide whether to adopt
real-time pricing – they are present biased and make ‚now-or-never‘ decisions rather than strategically
time adoptions.
Given these observations, the authors derive two sets of policy recommendations: First, strategically
timing when consumers adopt real-time pricing can increase the chances that consumers remain on
real-time pricing and limit the risks that a crisis interrupts the unraveling process, Pébereau and Remmy
argue. Switching should be encouraged “for instance through advertising campaigns or with subsidies.”
Second, providing information to consumers, both before and after adoption, can accelerate the
learning process and help them make rational and informed decisions. “It is essential that consumers
understand how spot prices form and that long-run gains can compensate for immediate losses,” the
authors said.
“A simple policy would be to facilitate access to records of household consumption profiles and use
them on tariff comparison websites,” they concluded.
The presented discussion paper is a publication without peer review of the Collaborative Research Center (CRC)
Transregio 224 EPoS. Access the full discussion paper here. Find the list of all discussion papers of the CRC here.
Authors
- Charles Pébereau, Postdoctoral scholar in Economics at Stanford University Graduate School of Business
- Kevin Remmy, member of the Collaborative Research Center Transregio 224 EPoS and Postdoctoral researcher at the University of Mannheim