A review of barriers in implementing dynamic electricity pricing to achieve cost-causality

Abstract

Abstract Rapidly changing economics, customer preferences, and policy to address climate change and local environmental pollutants have driven increased deployment of a wide range of distributed energy resources in the U.S. electricity system. Distributed energy resources have enabled an expanded role for energy consumers and non-utility third parties to reshape system costs, drawing renewed attention to the potential of reforming electricity rate design based on the further application of cost-causal principals to improve overall system fairness and efficiency. One mechanism to move toward greater application of cost-causal rate design is dynamic pricing, which varies electricity prices across time and location to reflect costs of providing electricity to consumers under specific market conditions and grid operation conditions. While dynamic electricity pricing has penetrated some markets, and it has not been widely implemented, particularly for residential consumers. In this review article, we provide a brief summary of electricity rate design, including the possibility of introducing dynamic prices, and explain why dynamic prices are more reflective of the short-run marginal costs of electricity supply than volumetric rates. We then explore the barriers to the widespread adoption of residential dynamic pricing, emphasizing technical, economic, and political challenges. Our assessment reflects the ability of dynamic prices to engender more equitable and efficient outcomes by achieving the goal of cost-causality, and we argue that a move toward more dynamic pricing can constitute a welfare improvement over volumetric rates. However, dynamic pricing does not completely address the full set of challenges associated with rate design and, alone, is unlikely to enable the full recovery of fixed costs and the fair attribution of the positive and negative externalities of electricity provision. Therefore, electricity rate design requires tradeoffs, making it as much an art as a science. This analysis synthesizes literature across multiple fields and suggests avenues for further research.