Costs and Benefits of Dynamic Pricing in the Australian Energy Market Presented by Brattle Economist
The results of a recent Brattle study examining the costs and benefits of dynamic pricing in the Australian energy market were presented today at a public forum organized by the Australian Energy Market Commission (AEMC) in Melbourne, Australia. The Brattle study was part of an AEMC draft report on increasing demand-side participation in Australia’s energy market.
The Brattle report reviews the various forms of dynamic pricing, such as time-of-use pricing, critical peak pricing, peak time rebates, and real time pricing, for a variety of performance metrics including economic efficiency, equity, bill risk, revenue risk, and risk to vulnerable customers. It also discusses ways in which dynamic pricing can be rolled out in Australia to raise load factors and lower average energy costs for all consumers without harming vulnerable consumers, such as those with low incomes or medical conditions requiring the use of electricity.
Commenting on the report, co-author and Brattle principal Ahmad Faruqui said, “While most people agree that dynamic pricing will improve grid utilization and lower power costs for all consumers, there are concerns that it will adversely affect vulnerable consumers. In this paper, we discuss different ways in which the well-being of these consumers can be protected.” The benefits of dynamic pricing have been documented in a number of studies, many of which find that the best way to maximize these benefits is to offer dynamic pricing as the default tariff.
In preparing the report for the AEMC, Brattle economists reviewed dynamic pricing practices worldwide and identified three specific ways that vulnerable consumers can be protected: (1) given their extenuating circumstances, they can be excluded from dynamic pricing; (2) they can pay the lower of the two bills – what they would have paid had they stayed on a flat rate, or the one they would pay on a dynamic pricing rate; or (3) they would be allowed to buy their minimum energy needs on a flat rate and buy additional electricity on a dynamic pricing rate.
The Brattle report, “Managing the Costs and Benefits of Dynamic Pricing,” was authored by Dr. Faruqui and Brattle associate Neil Lessem, and is included within the AEMC draft report, “Power of Choice: Giving Consumers Options in the Way in which they Use Electricity.”