Pricing policies for efficient demand side management in liberalized electricity markets

Abstract

International experience has shown that electricity consumers react to pricing policies by switching retailers or shifting part of their consumption from peak to off-peak hours. This behavior has a direct effect on the competition between retailers. In the light of this evidence (and considering the increasing penetration of smart meters) this study presents a theoretical framework in which retailers compete on time-of-use (ToU) pricing. In this case, the model is calibrated with Spanish data. Our objective is to determine whether the ToU pricing that emerges from the retail competition makes for greater efficiency than a fixed tariff, and if so, then to what extent. We also examine how efficiency gains are distributed between retailers and consumers. According to the results, the price signal to consumers under ToU pricing may be effective for modifying their consumption patterns and obtaining social welfare gains. As for the intermediate values of consumers’ elasticities, ToU pricing is a win–win for both retailers and consumers. This has substantial implications in terms of cost-efficiency.