Distributional Effects of Dynamic Pricing for Responsive Electricity Demand (DEePRED)

Peak electricity demand is becoming an increasingly significant problem for UK electricity networks as it causes imbalances between demand and supply with negative impacts on system costs and the environment. The residential sector is responsible for about one third of overall electricity demand and up to 40% of peak demand. During peak demand, electricity prices in wholesale markets could fluctuate from less than £0.03/kWh to as much as £0.29/kWh.

Time of Use tariffs offer significant potential benefits to the system by enabling responsive electricity demand and reducing peaks. For example, this could reduce the need for new generation and network capacity. However, the impact of more cost-reflective pricing will vary between consumers. In particular, those who consume electricity at more expensive peak periods, and who are unable to change their consumption patterns, could end up paying significantly more.

Understanding the distributional effects of Time of Use tariffs becomes vital to ensuring affordability of energy bills, whilst making demand more flexible. Whilst there is research on fuel poverty in relation to aggregate level of consumption of electricity, little is known about the effects of dynamic tariffs on different socio-demographic groups. DEePRED will fill this gap.

The overall aim of DEePRED is to analyse the distributional effects of Time of Use tariffs with a view to identify clusters of users which might significantly benefit or be disadvantaged through the provision of demand flexibility.

The project will analyse 10-minute resolution time use activity data from the UK Office for National Statistics Time Use Survey with a view to derive information about times of the day in which different groups of people occupy households and carry out energy-related activities. The time use data will be combined with parameter data on temperatures, sunlight, number and typical consumption of household appliances and dwelling types to derive load profiles. This will take place thanks to the implementation of activity schemes. Load profiles data will then be used to calculate how consumer bills may change for different groups of consumers on stylised Time of Use tariffs.

This Impact Summary describes who potential beneficiaries might be, and how DEePRED might impact them.

-Residential electricity consumers (beneficiaries, direct impact) will be able to choose from lower tariffs thanks to a whole range of Time of Use tariffs. The results of the study will indicate which Time of Use tariffs suit different clusters of households based on their time-use flexibility. This will be informed by an innovative form of segmentation of end-users.

-Energy suppliers (beneficiaries, indirect impact) will benefit from increased knowledge around novel techniques of clustering users. This may facilitate customers' segmentation, which is critical for the success of Time of Use pricing.

-Policy-makers (users, indirect impact) may find the findings on distributional effects of Time of Use tariffs useful as part of any evidence-based approach to regulating dynamic tariffs. For instance, policies on new Time of Use tariffs will avoid penalising vulnerable consumers who suffer from lower income and shortage of time to take part in flexible demand programmes.

-Energy aggregators (beneficiaries, indirect impact) will be provided with an empirical framework which informs about Demand Side Response (DSR) investment options in the residential electricity market. From the findings of the proposed project they will be able to make informed decisions about levels of investment for different segments of demand (based on activity-based clusters). An expansion of the DSR market for residential customers will open competition to leading aggregators companies from the U.S. and elsewhere in Europe.