Electricity Retail Rate Design in a Decarbonizing Economy: An Analysis of Time-of-use and Critical Peak Pricing

Abstract

Currently, the main component of most U.S. consumers’ electricity bills is based on a constant price per kWh consumed. As intermittent renewable resources and flexible loads that can be shifted within days (such as electric vehicle charging) gain prominence in the electricity system, the efficiency gains to be realized from basing bills instead on wholesale spot prices increase. There is little political support for this change, however. We focus on second-best alternatives: time-of-use (TOU) rates and critical peak pricing (CPP). We introduce alternative assessment criteria that focus on intra-day load shifting. Using historical data, we find that TOU rates can reasonably replicate the intra-day load-shifting incentives provided under spot pricing. Thus, TOU rates, especially when complemented with CPP involving load control during infrequent scarcity price events, can be considerably more socially valuable than previously estimated.