Price it Right: Household Response to a Time-of-Use Electricity Pricing Experiment in Auckland, New Zealand

Abstract

In 2008, Mercury Energy recruited 400 households in a suburban area of Auckland to participate in a Time-of-Use (TOU) electricity pricing experiment. The experiment lasted one year. Its aim was to gauge consumer interest in and response to electricity prices that vary over the course of the day. This thesis reports the results of analyses of that response in a Constant Elasticity of Substitution (CES) framework. The elasticity of consumer substitution was estimated, on average, to be about -0.051. This implies that a 100% increase in the ratio of peak to off-peak price would result in a 5.1% decrease in the peak to off-peak consumption ratio. The substitution elasticity varied systematically with a variety of house and household characteristics. Of interest, however, is that the response to low off-peak prices was stronger, on average, than the response to higher peak prices. It appears that households took advantage of lower prices off-peak more than they substituted off-peak for peak consumption. A cost benefit analysis nevertheless indicates a potential net benefit from this kind of TOU rate design.