Research

Household electricity consumers’ incentive to choose dynamic pricing under different taxation schemes : Electricity consumers' incentive to choose dynamic pricing

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Abstract

Dynamic pricing of retail electricity, as opposed to the widely applied average pricing, has often been proposed to enhance economic efficiency through demand response. The development of variable production from renewable energies and expectations about the installation of heat pumps and electric vehicles has now reinforced interest in flexible demand and dynamic pricing. With a roll-out of smart metering one important technical hurdle is going to be cleared, and dynamic retail pricing may soon become an eligible option for many households. We quantify the potential incentives to adopt new pricing schemes using exemplary Danish data. Until now, limited activity of household consumers on retail markets indicates that switching supplier or contract is perceived costly. We apply the concept of switching costs to explain this hesitant behavior, and use it to estimate a threshold level based on recent observations in the Danish market. We calculate potential savings from dynamic pricing and show how the choice of electricity taxation technique may hamper or enhance potential benefits. In the light of switching costs, our results suggest that the combination of smart meter roll-out and dynamic pricing offerings might be insufficient to convince the majority of households to switch contracts and become active in response to prices, unless they hold a substantial flexibility potential. Dynamic taxation, even if applied to parts of the levies, could contribute significantly to inducing flexible consumption.