Risk preference and adverse selection for participation in time-of-use electricity pricing programs

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Time-invariant electricity pricing does not reflect daily variation in the cost of producing electricity and thus can cause economic inefficiency. Time-of-use pricing (TOU), which has higher electricity prices during peak hours and lower prices during non-peak hours, is a pricing scheme that can help achieve more efficient levels of electricity consumption. This study examines factors influencing consumers’ participation in voluntary TOU programs with particular attention to individual-specific risk and time preferences elicited through multiple price-list experiments. Evidence from a study of 398 homeowners in Arizona and California, U.S., indicates that more risk averse consumers are less likely to enroll in TOU programs. The results suggest evidence of adverse selection, with households who consume less energy during peak hours being more likely to enroll in TOU programs. Time preferences are found to have a statistically significant and negative impact on consumers’ adoption of programmable thermostats, a technology that can allow households to better respond to TOU pricing. However, we find no evidence that consumers’ decisions to enroll in TOU programs and adopt programmable thermostats are correlated. Our results have important implications for policymakers and utility companies, which attempt to increase participation in voluntary TOU programs.