Time-of-use tariffs
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Understanding Time-of-Use Tariffs: Adoption, Impact, and Consumer Behavior
Introduction to Time-of-Use Tariffs
Time-of-Use (TOU) tariffs are a demand-side management strategy designed to encourage consumers to shift their electricity usage to off-peak times by varying the price of electricity throughout the day. This approach aims to make electricity consumption more efficient, reduce peak demand, and lower overall energy costs1 3 4.
Consumer Adoption of TOU Tariffs
Opt-In vs. Opt-Out Enrollment
Consumer adoption of TOU tariffs varies significantly based on the enrollment method. When consumers are required to opt-in, uptake rates can be as low as 1%, but with efforts to close the intention-action gap, this can increase to 43%. Conversely, if TOU tariffs are implemented on an opt-out basis, adoption rates can approach 100%1. This highlights the importance of enrollment strategies in achieving widespread adoption.
Factors Influencing Willingness to Switch
Several factors influence consumers' willingness to switch to TOU tariffs. National surveys often overestimate the actual adoption rates, as the median proportion of consumers willing to switch is five times higher than the actual enrollment rates observed by utilities1. Additionally, real-time pricing tariffs, which vary prices freely throughout the day, are generally less popular than static TOU tariffs with fixed peak and off-peak rates1.
Socio-Demographic Influences
Socio-demographic factors also play a role in the adoption of TOU tariffs. For instance, high-income groups in London and households with children (not in the high-income group) tend to benefit more from TOU tariffs2. Moreover, loss-aversion and ownership of demand-flexible appliances, such as electric vehicles, significantly influence the willingness to switch to TOU tariffs8.
Impact of TOU Tariffs on Electricity Demand
Peak Load Shifting and Energy Savings
TOU tariffs are effective in shifting electricity demand from peak to off-peak periods, leading to significant energy savings and reduced need for costly and CO2-intensive redispatch3 6. However, while TOU tariffs can reduce morning peak loads, they may not resolve issues with evening peaks, and in some cases, can even increase peak demand at substations5 6.
Distributional Effects
The financial impact of TOU tariffs varies across different socio-demographic groups and regions. For example, high-income households in London benefit more from TOU tariffs, while other groups may not see the same level of financial advantage2. This indicates that TOU tariffs can have varying distributional effects based on household composition and regional differences.
Designing Effective TOU Tariffs
Addressing Price Elasticities and Consumer Behavior
Designing effective TOU tariffs requires considering the price elasticities of demand and consumer behavior. A stochastic optimization approach can help address uncertainties in price elasticities and design tariffs that balance the needs of both consumers and utilities4 7. Properly designed TOU tariffs can create a win-win situation, where producers increase profits and consumers save on electricity costs7.
Combining TOU with Other Tariff Structures
Combining TOU tariffs with other structures, such as stepwise power tariffs (SPT), can enhance their effectiveness. A multiobjective model that integrates TOU and SPT can achieve efficient energy savings and peak load shaving, making it a viable strategy for residential energy conservation9.
Conclusion
Time-of-Use tariffs offer a promising approach to managing electricity demand and reducing peak loads. However, their success depends on effective enrollment strategies, understanding consumer behavior, and addressing socio-demographic differences. By optimizing tariff designs and combining them with other pricing structures, TOU tariffs can provide significant benefits for both consumers and utilities, contributing to a more efficient and sustainable energy system.
Sources and full results
Most relevant research papers on this topic
Consumer demand for time of use electricity tariffs: A systematized review of the empirical evidence
Consumer demand for time-of-use electricity tariffs is high, but enrolment rates may be low unless efforts are made to close the intention-action gap.
Highly CitedDistributional effects of Time of Use tariffs based on electricity demand and time use
Time of Use tariffs may have different distributional effects on residential electricity consumers based on their financial position and time availability, with regional differences and household composition similarities.
Consumers’ Willingness to Accept Time-of-Use Tariffs for Shifting Electricity Demand
70% of German consumers are willing to accept time-of-use tariffs to shift electricity demand, leading to significant savings in electricity generation and avoiding up to a mid to large-sized fossil-fuel power plant.
Time-of-Use Tariff Design Under Uncertainty in Price-Elasticities of Electricity Demand: A Stochastic Optimization Approach
This paper proposes a stochastic optimization approach for designing time-of-use electricity tariffs under uncertainty in price-elasticities of demand, addressing various aspects of tariff design from the regulator's perspective.
Highly CitedTime-of-use and time-of-export tariffs for home batteries: Effects on low voltage distribution networks
Home batteries operating under time-dependent electricity tariffs may cause little reduction in import and export peaks at low voltage levels, potentially even increasing demand.
Price-based demand side management: Assessing the impacts of time-of-use tariffs on residential electricity demand and peak shifting in Northern Italy
Time-of-use tariffs in Northern Italy lead to higher average electricity consumption and lower consumer payments, with significant load shifting for morning peaks but not evening peaks, and increased substation peak demand.
Highly CitedElectricity time-of-use tariff with consumer behavior consideration
Adopting a time-of-use tariff can create a win-win situation for both producers and consumers, increasing profits and reducing peak demand.
Highly CitedAre consumers willing to switch to smart time of use electricity tariffs? The importance of loss-aversion and electric vehicle ownership
Over a third of British energy bill payers favor switching to smart time of use tariffs, but loss-aversion and electric vehicle ownership significantly influence their willingness to switch.
Highly CitedMultiobjective Model of Time-of-Use and Stepwise Power Tariff for Residential Consumers in Regulated Power Markets
The proposed multiobjective optimal tariff-making model (TOUSPT) effectively achieves residential energy conservation and peak load shaving by combining time-of-use and stepwise power tariffs.
Why Have Voluntary Time‐of‐Use Tariffs Fallen Short in the Residential Sector?
Voluntary Time-of-Use tariffs in residential electricity markets are underwhelmingly adopted due to misaligned incentives between utilities and regulators, leading to less equitable cross-subsidization than default tariffs.
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