A study of consumers’ responses to real time pricing, by Hunt Allcott, examines 2003 and 2006 data from the Center for Neighborhood Technology’s Energy Smart Pricing Plan. Allcot observes:
This is a particularly interesting time to be studying real time pricing. Most US households currently have electricity meters that simply record the total consumption of electricity since installation, meaning that the consumer cannot be charged prices that vary from hour to hour. Furthermore, the only way for the electric utility to observe households’ consumption is to actually send a worker to read the meter, a costly and potentially error-prone process. The “Smart Grid” is a set of emerging electric power information technologies that include, among other things, household energy management devices and technologies that facilitate communication between electricity retailers and consumers. From the utilitys perspective, improvements in these technologies offer reduced meter reading and administrative costs and the potential for real time metering of electricity use. Furthermore, by allowing households to more easily observe prices and consumption, and even to automate how air conditioners and other appliances turn on and off in response to real time prices, Smart Grid technologies can increase consumers price elasticity of demand.
Allcot offers three key conclusions from his data analysis: households participating in the program were price elastic, but just a little; the typical response is conservation rather than load shifting; and energy management technology can signi cantly increase households’ price elasticity. He calls this final result “fundamental but perhaps unsurprising.” Perhaps unsurprising, but frequently overlooked: how many times have economists, utility executives, or policymakers claimed that power consumers are not responsive to electricity prices based upon observation of consumers lacking both the information and incentive to respond to prices?
Allcot then assessed the estimated welfare affects of real time pricing policies. In general he concluded that efficiency gains from consumer responsiveness to prices were not likely large enough to overcome the costs associated with conservation and metering infrastructure.
In weighing this conclusion, a couple of issues must be considered. As Allcott notes, as the CNT is a voluntary, “opt in” program, we may expect participants to be more likely to be price sensitive than other consumers. Switching all consumers to a real-time price may produce even smaller benefits. On the other hand, larger programs may induce more complementary offerings, enhancing responsiveness. For example, in the CenterPoint and Oncor service areas in Texas, millions of consumers will have smart metering, which may induce, say, local appliance retailers to promote “price aware” appliances and competitive energy retailers to offer real-time pricing contracts. (In fact, as noted by Lynne yesterday, energy retailer Direct Energy is partnering with an energy management systems developer, a electronics retailer, and two appliance makers to offer a consumer-friendly home energy management system. See Lynne’s post for more along these lines.)
Allcot observes in his paper that, prior to his own study, there was “no empirical evidence on how households would respond to hourly real time prices.” (Is this true? Sounds incredible. Surely somewhere … Lynne, do you know of anything?) Whether or not his report on the literature is correct, clearly this is, as Allcot says, “a particularly interesting time to be studying real time pricing.” More study is needed.