Do Residential Customers Respond to Hourly Prices? Evidence from a Dynamic Pricing Experiment

Widespread participation of retail electricity consumers in short-term wholesale electricity markets throughout the United States is rapidly becoming technologically feasible. A number of jurisdictions are installing or have installed interval meters for a large fraction or all of their retail customers. With this technology in place, the only remaining barrier is whether state regulators will require customers to pay for their electricity according to retail prices that vary with hourly system conditions. A common complaint about retail tariffs that pass through the hourly wholesale price in the retail price is that these dynamic pricing tariffs require customers to monitor hourly prices in order to decide whether to reduce demand during a given hour of the day. The customer must assess whether the pattern of hourly prices is sufficient to justify taking action to reduce demand. For example, if the customer has a fixed cost to take action to reduce demand and the wholesale price increase lasts only one hour, then a very large price spike is necessary to cause the customer to take action. Taking the example of a residential customer with a 2.5 kilowatt-hour (KWh) demand in that hour and $5 fixed cost of taking action to reduce demand by 20 percent implies that an hourly price spike of at least $10,000 per megawatt-hour (MWh), or 1,000 cents/KWh, is needed to produce sufficient cost savings from reducing demand by 0.5 KWh (20 percent of 2.5 KWh) to overcome the $5 cost of taking action. This logic implies that if customers face a fixed cost of taking action to reduce their demand, there may be hours with high prices that the customer decides not to respond to because the expected cost savings from the Do Residential Customers Respond to Hourly Prices? Evidence from a Dynamic Pricing Experiment