Time-of-day electricity pricing incorporating elasticity for load management purposes

Abstract

This paper presents a method for setting electricity tariffs for use within a distribution power utility. The paper considers a way of reducing the peak demand by using price as a signal to communicate messages to consumers. There have been many studies on electricity pricing and all have drawn the general conclusion that the price of electricity is a significant factor which can be used in load management schemes. This view leads to the need to investigate quantitatively the responsiveness of demand to the price of electricity or, in other words, the price elasticity of the demand. The paper develops an econometric model for the demand for electricity in the domestic sector. The elasticity value obtained is then incorporated into novel time-of-day tariffs which embody factors for inclusion in a load management strategy. Two methods of setting electricity tariffs are presented in this paper. First, the Linear Programming method (LP): a time-of-day tariff is formulated by using a Linear Programming method. In this method, a typical electrical load profiles for each type of load (e.g. domestic, commercial and industrial) is used along with the consumer class and targeted revenue for the particular class. Second, the Total Surplus (TS) method. In this method the tariff is set by maximizing the total joint surplus of consumers and producers in the electrical energy sector. The economic basis of this method is to set the price equal to the marginal cost of the product, namely electrical energy. However, in practice this may not achieve the required aims and one has to seek a ‘second best’ solution in which price is derived by incorporating the load factors and elasticities into the cost elements. This combination allows a utility to adjust the price of electricity to meet required revenue targets and to satisfy the demand for electrical energy.