SEMINAR 25 January 2013: Jeremy Blair Smith, Boston University

The Effect of Mandatory Time-of-Use Pricing Reform on Residential Electricity Use

Abstract

Time-of-use (TOU) electricity pricing has attracted attention as a potential policyto reduce peak electricity demand and thus address the engineering and environmentalchallenges associated with electricity production. However, convincing evidence of its effctiveness is lacking in the literature. In this paper, we analyze short-run household responses to a large-scale field deployment of TOU pricing. Households that breached a usage threshold were forced to switch from a flat-rate plan to one with a high electricity price during peak hours (noon through 8pm on weekdays) and a low price during all other hours. Features of the program implementation give rise to multiple natural experiments that we exploit within a regression discontinuity framework. We find that, after being switched to TOU, large households substantially reduced total electricity consumption during the summer months. However, some of the responses we find are inconsistent with static utility maximization. For example, households reduced their off-peak consumption at some times of the year when rates were such that a static optimizer should have unambiguously increased off-peak consumption. This indicates either that they were subject to additional constraints or were responding to incentives other than contemporaneous prices.