CERE Working Papers,
CERE - the Center for Environmental and Resource Economics

Abstract: In this study, using sub-hourly appliance-level data from a representative sample of Swedish households on standard tariffs, we investigate the welfare and emission implications of moving to a mandatory dynamic pricing scheme. We treat demand during different hours of a day to affect utility differently, and account for the derived nature of electricity demand by explicitly considering the services (end-use demands) that drive hourly electricity demand. We use the flexible EASI demand system, which accommodates both observed and unobserved heterogeneity in preferences, to understand changes in load consequent to moving to dynamic pricing schemes. We find changes in load patterns across hours to be relatively small (with at most a three percent reduction during the morning peak, and a two percent increase in the off-peak times), and welfare and emissions to decrease slightly (a maximum of 0.2 percent and 0.25 percent, respectively). Overall, in the context of a decentralized electricity retail setting such as in Sweden, our results call into question both the desirability (from a short-run welfare perspective) or the feasibility (from a consumer perspective) of the emphasis on ensuring that the retail price of electricity be aligned to the hourly marginal cost.

Keywords: Appliance holdings; Electricity; Energy demand; Demand system; Dynamic pricing

JEL-codes: C30; D12; Q41

38 pages, February 22, 2019

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