Abstract:

The impacts of residential critical peak pricing: Evidence from California's statewide pricing pilot. California's Statewide Pricing Pilot explored the impact of Critical Peak Electricity Pricing (CPP) for residential customers. These customers were socioeconomically diverse and lived in diverse climate zones. This paper takes a flexible, difference in difference approach to estimating the impacts of the statewide pricing pilot and provides evidence about (1)?the kinds of customers and situations in which CPP is likely to generate the greatest response and (2)?how CPP will affect different subgroups of the population. It finds that dynamic pricing had larger absolute kilowatt load impacts on hotter days and on larger customers. It estimates that the benefits of dynamic pricing range from zero in cooler climates on cooler days to .3 (.4) kW every hour for increased afternoon (''critical peak") prices on the hottest days in hot climates. A program designed to address extreme electrical demand on hot summer days worked best in regions that were hot enough that most customers had air conditioning and in conditions that prompted them to use air conditioning. Targetting extra marketing efforts at the kind of hot-region customers who reduced electricity use the most when power prices rose is likely to increase the program's benefits.

Applying psychology to economic policy design: Using incentive preserving rebates to increase acceptance of critical peak electricity pricing. This project extends the idea that policy makers should address problems by improving economic incentives. This project adds that presenting incentives in a way that reflects how people make decisions can sometimes improve consumers' responses to the incentives and policy outcomes. This paper uses behavioral economics to propose ways to increase electricity policy effectiveness.

The cost of generating power fluctuates enormously from hour to hour but most customers pay time-invariant prices for power. The mismatch between the fluctuating cost and the fixed price wastes billions of dollars. Critical Peak Pricing (CPP) reduces this waste by setting offpeak, peak, and ''critical" prices that better reflect the cost of power during time periods. Customers in CPP pilot programs used less power during high-priced periods than did customers on traditional, time-invariant rates. CPP customers reported high satisfaction levels and often saved 10% or more. Yet, roughly 99% of customers reject opportunities to switch to CPP. The psychology literature documents a set of decision making heuristics that people use to choose among options with uncertain payoffs. This paper describes the evidence that one or more of these heuristics explains customer reluctance to opt-in to CPP. It then suggests Incentive Preserving Rebates that change the presentation of CPP to address these heuristics. Incentive Preserving Rebates reframe scarcity ''events" as opportunities to get rebates rather than as periods of extremely high prices. Incentive Preserving Rebates change the presentation, but change neither marginal incentives nor each customer's total annual payments. The paper then explores the implications of Incentive Preserving Rebates for customers who participated in a California pilot program.

Optimal deployment of a simple menu of incentive preserving rebates for CPP rates with heterogeneous customers. The previous chapter proposes using Incentive Preserving (IP) Rebates to change the presentation of critical peak pricing (CPP) in a way that makes it more attractive to consumers. Adding IP Rebates to critical peak pricing maintains CPP's marginal incentives and leaves each customer's total annual bill the same. IP rebates work by selling each customer rights that they can either use to buy power at the usual price during a highprice ''event" or to cash in for a rebate. Customers buy their own rights bundled with the first units of power they buy each month. An IP rebate implementation has to assign each customer a quantity of rights per event and the amount of power that the rate marks up each month to pay for these rights. Good choice of quantities make IP rebates more likely to work as promised. Simple, effective assignment rules are desirable. This project shows that it is possible to derive a small, optimized menu of IP rebate offers that assigns existing categories of customers into low, medium, and high use categories. It shows that these offers work well for the customers who participated in California's Statewide Pricing Pilot (SPP). These offers use existing customer categories. Using three optimal categories far outperforms one and two-category offers. Four and five category offers perform modestly better than the three category offer, but perhaps not enough to justify the added complexity. The three, four, and five category offers all achieve at least 96% of the benefit level of making one offer to each of the 16 groups of customers. The optimal three category offer makes consistent offers to between 75% and 90% of the customers in most groups. An offer is consistent if the customer gets consistent rebates during each month with an event and consistently purchases the rights that the rate offers them. A customer gets consistent rebates if the offer includes enough kWh at the usual price so that the customer gets a (weakly positive) rebate during each month with an event. The customer makes consistent rights purchases if the rights come bundled with a number of units of power that is less than the customer uses each month. This offer performs far better than a single, statewide one-size-fits-all offer or making one offer for each of the four climate zones. Thus, it is possible to consderably simplify IP Rebate rates while preserving their performance. Good rates will both require differentiating among customers by energy consumption level or a good proxy for it. Even the best rates considered here require accepting that a few customers will not get offers that are ideal matches for their consumption patterns.