Abstract:
“Allocative Efficiency and Capacity Constraints: Evidence from Residential Electricity Pricing”
Marten Ovaere* (Ghent University) and Mark Vergouwen (Ghent University)
Electricity systems are under growing pressure as households increasingly adopt electric vehicles, heat pumps, and other electric technologies. These technologies add substantial new demand, much of it flexible in timing. At the same time, dynamic electricity prices are being introduced, encouraging consumers to shift consumption to low-price hours. While such pricing improves production efficiency, it can also unintentionally concentrate demand in the same hours, worsening local peak loads and increasing the need for costly grid expansion. This paper uses high-frequency smart-meter data from Belgium to study how residential electricity demand peaks respond to real-time prices and peak demand charges. We find that real-time electricity pricing increases household peak demand by about 3 percent, as consumption shifts toward low-price hours. Fortunately, these household-level responses do not translate into statistically significant increases in peak demand at the distribution level. In contrast, peak demand charges reduce household peak demand by about 3 percent. This effect is driven almost entirely by households with electric vehicles, which lower their peak demand by roughly 500 watts and shift about 1 kWh per day from evening peaks to nighttime hours. Households without large flexible loads respond only temporarily. Importantly, household-level effects from the peak demand charge aggregate to lower local grid demand peaks, reducing costly, capital-intensive grid investment.
*Denotes presenter