Dynamic pricing of electricity: Enabling demand response in domestic households

Abstract

Fluctuations in retail energy prices may incentivize domestic households to adapt their load pattern in order to minimize the cost of electricity. This paper determines the price volatility necessary for automatic load shifting to cover the cost of the associated smart metering within a household. This study shows that current price volatility does not allow sufficient savings to compensate for additional metering costs. However, results indicate that a change towards an ‘ad-valorem’ electricity taxation dependent on exchange prices could make residential demand-side management profitable. At the same time, the potential price risk for consumers that do not react to pricing signals because of a lack of smart devices, is almost negligible. As consumption patterns suggest, these households consume in times of both high and low prices, thereby almost canceling out higher payments at peak times even without any load shifts. With these results, policymakers can anticipate the effects of dynamic retail prices on electricity and derive the implications of different taxation settings.