Dynamic Pricing of Electricity for Residential Customers: The Evidence from Michigan

Abstract

The rollout of smart meters has enabled the provision of dynamic pricing to residential customers. However, doubts remain whether households can respond to time-varying price signals and that is preventing the full scale rollout of dynamic pricing and the attainment of economic efficiency. Experiments are being conducted to test price responsiveness. We analyze data from a pilot in Michigan which featured two dynamic pricing rates and an enabling technology. Unlike most other pilots, it also included a group of “information only” customers who were provided information on time-varying prices but billed on standard rates. And unlike all other pilots, it also included two control groups, one of whom knew they were in the pilot and one of whom did not. This was designed to test for the presence of a Hawthorne effect. Consistent with the large body of experimental literature, we find that customers, including low income participants, do respond to dynamic pricing. We also find that the response to critical-peak pricing rates is similar to the response to peak-time rebates, consistent with the finding of one prior experiment but inconsistent with the finding of two prior experiments. We also find that the “information only” customers respond to the provision of pricing information but at a substantially lower rate than the customers on dynamic pricing. We find that the response to enabling technology is muted. We do not find any evidence to suggest that a Hawthorne effect existed.

Keywords: Dynamic pricing, social experiments, electricity, demand response, consumers energy, Michigan