Time-of-Use Electricity Prices

In: Business and Management

Submitted By mfurtado
Words 1107
Pages 5
UNCERTAINTY AND DECISION MAKING
In many countries, the majority of the consumers pay a fixed price per unit of electricity used regardless of when their consumption occurs. However, the costs to produce electricity vary a lot at different times of the day. Electricity cannot be stored. It must be generated and supplied to each customer as it is called for instantly, day or night, in extremely variable quantities. In virtually all power systems, electricity is produced by generators that are dispatched in merit order, i.e., generators with the lowest marginal cost (lowest variable cost of production) are used first, followed by the next cheapest, etc., until the instantaneous electricity demand is satisfied. In order for the electrical system to be prepared to meet peak demand (typically, peak demand occurs in the late afternoon when people come back home from their jobs) it is necessary to keep a vast array of expensive equipment - transformers, wires, substations, and generation stations - on constant standby. The amount and size of this equipment must be large enough to be able to meet consumption at the highest peak demand period. Otherwise, if total demand exceeds total production at some moment in time, there will occur severe instabilities such as voltage drops or even generalized blackouts. Therefore, if a country could shift part of its electricity usage away from peak periods to other periods of the day (that is, if consumers could smooth their consumption pattern throughout the 24 hours of a day) it would be possible to attain major savings in installed generating capacity and therefore to lower the overall costs of electricity. To achieve this, several countries have implemented "time-of-use" pricing schemes where the price that consumers pay changes throughout the day (with higher prices at peak periods and lower prices at off-peak periods). This…...

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