Time-varying electricity pricing and consumer heterogeneity: Welfare and distributional effects with variable renewable supply

Abstract

Advanced metering infrastructure is being rolled out at large scale in many U.S. and European power markets, allowing for exposing consumers to time-varying electricity prices. The latter is considered crucial for coping with growing variable renewable electricity supply and essential for allocative efficiency in electricity markets. Yet, significant amounts of the potential efficiency gains from time-varying tariffing may be left unrealized, since many residential and commercial retail consumers could actually prefer to stick with the usual default, which is flat tariffing, in order to avoid potential consumption cost increases. We study how increasing variable renewable supply affects individual consumption cost changes from implementing real-time retail pricing among residential consumers, using consumption data from Germany and simulating long-run electricity market equilibria. We find that most customers face comparatively small bill changes at high renewable supply shares. We further analyze how consumer heterogeneity influences the unrealized welfare gains from rejecting real-time pricing. Applying synthetic residential, commercial and industrial demand profiles calibrated to German market data, we find that unrealized welfare gains are 18% to 57% larger, if mostly residential and commercial instead of industrial customers remain flat-priced. The corresponding unrealized welfare gains can more than quadruple to 1.1 bn EUR per year, if renewable supply shares increase. Additionally, targeted rollouts of real-time pricing can entail adverse distributional effects across consumer sectors. Particularly residential consumers can face rate increases, if mainly industrial consumers adopt real-time pricing.