Our demand for electricity varies from one time to another, and – with variable forms of renewable energy such as wind and solar – the same is true for electricity supply. This means that it costs more to supply electricity at some times than at others. It seems to be a good idea to allow us as consumers to take advantage of this cost variability in situations when we can shift our demand to times when electricity is cheap. Meters that “know” what time we consume electricity are an essential element in this and are often called “smart” meters. Public policy at national and European level aims at more consumers having smart meters. It is therefore disturbing that a recent article by Thomas-Olivier Léautier of the Toulouse School of Economics argues that for the “vast majority of residential consumers” a switch to real time pricing would be worth only €1-€4 per year: much less than the price of the new meter. (this link is to an earlier draft than the one I read). This is all the more disturbing to me because when I worked on public transport, microeconomists from Toulouse came closer than any others to finding models describing oligopolistic situations in which operators unavoidably have market power – a characterisation that is as true of electricity markets as it of those for public transport. However, the article seems (if I have not misunderstood) to:
- Only take into account variability in demand, not variability in supply – and therefore not the implications of the presence in the market of variable renewable sources of energy;
- Only allow consumers to reduce their demand (experiencing a loss of welfare to offset the cost saving) and not to shift their demand in time (for example by cooling freezers way down when the wind is blowing);
- Conclude that an increase in the share of price-reactive consumers will not affect the price of electricity – which seems unlikely to be a general result;
- Assume that electricity pricing takes the form of optimally designed two-part tariffs.
For these reasons, I think this article is a useful beginning of the microeconomic exploration of this topic, but not the end of the story.