When Do Consumers Lose from Variable Electricity Pricing?

Abstract

Time-varying electricity pricing better reflects the varying cost of electricity compared to flat-rate pricing. Variations between peak and off-peak costs are increasing due to weather variation, renewable intermittency, and increasing electrification of demand. Empirical and theoretical studies suggest that variable pricing can lower electricity supply costs and reduce grid stress. However, the distributional impacts, particularly on low-income consumers, remain understudied. This paper develops a theoretical framework to analyze how consume heterogeneity affects welfare outcomes when electricity markets transition from flat-rate to time-varying pricing, considering realistic assumptions about heterogeneous consumer demand, supply costs, and utility losses from unmet consumption. We derive sufficient conditions for identifying when consumers lose utility from pricing reforms and compare welfare effects across consumer types. Our findings reveal that consumer vulnerability depends on the interaction of consumption timing, demand flexibility capabilities, and price sensitivity levels. Consumers with high peak-period consumption and inflexible demand, characteristics often associated with low-income households, are most vulnerable to welfare losses. Critically, we demonstrate that demand flexibility provides welfare protection only when coincident with large price changes. Our equilibrium analysis reveals that aggregate flexibility patterns generate spillover effects through pricing mechanisms, with peak periods experiencing greater price changes when they have less aggregate flexibility, potentially concentrating larger price increases among vulnerable populations that have a limited ability to respond. These findings suggest that variable pricing policies should be accompanied by targeted policies ensuring equitable access to demand response capabilities and pricing benefits.