Fairness and Dynamic Pricing: Comments

Introduction In “The Ethics of Dynamic Pricing,” Faruqui (Faruqui 2010) lays out a case for improved efficiency in using dynamic prices for retail electricity tariffs and addresses various issues about the distributional effects of alternative pricing mechanisms. The principal contrast is between flat or nearly constant energy prices and time-varying prices that reflect more closely the marginal costs of energy and capacity. Dynamic pricing includes time-of-use (TOU) rates with set periods for higher and lower prices, critical peak pricing (CPP) with higher prices applicable on selected days after notification of critical conditions, and real time pricing (RTP) that follows the actual prices updated on an hourly over even more frequent basis. The greater variability of dynamic prices at different times implies variability in average prices and total bills, which might increase the associated risks and costs for some customers. The fairness issues of electricity market design focus on residential and small electricity customers; industrial and large commercial customers are different and deemed capable of managing and hedging real-time prices.