Electricity time-of-use tariff with consumer behavior consideration

Abstract

This paper investigates an electricity time-of-use (TOU) tariff problem with the consideration of consumer behavior. Under the TOU tariff, we consider two periods: the peak and base periods. A two-level model is established to solve the TOU tariff problem: in the upper level, the producer determines the TOU tariff with the consideration of consumer behavior; in the lower level, the consumers respond to the TOU tariff through shifting some electricity consumption in the peak period to the base period. Using the traditional flat-rate (FR) tariff as a baseline, we verify the conditions under which the producer has incentives to adopt the TOU tariff. With the adoption of a general consumer transfer cost, we solve for the optimal TOU tariff under different situations. Our results demonstrate that proper adoption of the TOU tariff can create a win–win situation for both the producer and the consumers: the producer can increase its profit and the consumers can save their electricity cost. We further evaluate the effectiveness of the TOU tariff in terms of the peak demand reduction. Using a quadratic transfer cost, we obtain some managerial insights into the TOU tariff problem, and illustrate that the TOU tariff is always beneficial to the producer and the consumers under the quadratic transfer cost.