System-wide benefits of temporal alignment of wholesale–retail electricity prices

Abstract

Exposing residential consumers to real-time pricing (RTP) can yield significant efficiency gains, but may also pose challenges due to the inherent complexity. Using an extensive spectrum of temporal granularities for retail electricity pricing, we analyze to what extent these capture the benefits of RTP while concurrently considering the influence of three distribution tariff types in distorting the pricing signal. Via a mixed complementarity model, we consider both operational and investment decisions at retail as well as wholesale levels, accounting for their interdependencies. Our analysis reveals three key findings. Firstly, we find that decreasing temporal granularity of retail electricity prices increases total system cost due to an increasingly inefficient generation mix, however, three-hourly or six-hourly pricing can approximate RTP benefits. Secondly, decreasing temporal granularity of retail electricity prices raises average offtake and lowers average injection prices for consumers due to changes in wholesale market prices as well as consumption patterns of consumers. Thirdly, capacity-based tariffs reduce system offtake peaks and associated price increases by incentivizing battery discharge during peak consumption while volumetric tariffs, over-incentivizing solar PV investments, result in highest offtake prices and injection peaks.