Impact of Time of Use (TOU) Retail Pricing in an Electricity Market with Intermittent Renewable Resources

Abstract

The share of renewable energy in the overall production of electricity has been increasing in recent years. However, there are worries that increase in share of solar and wind power could destabilize the grid owing to their being intermittent resources. We explore the impact of a Time of Use (TOU) retail pricing in a capacitated and deregulated electricity market that is supplied from a finite mix of intermittent renewable and steady non-renewable resources. Our modelling attempts to address a research void by considering both demand (retail) and supply (renewable energy) as variable. An efficient feed-in-tariff (FIT) as identified in literature, where the FIT is linked to the wholesale price, is considered for energy procured from renewable sources. The FIT so considered ensures that that demand is met first by electricity from renewable sources, which is in line with sustainable energy arguments. Through a set of experiments the TOU retail pricing is compared with fixed retail pricing. Our models and the numerical experiments reinforce the existing literature that increasing share of renewable energy reduces energy prices under both pricing schemes. Our experiments indicate that with increasing share of renewable energy, and demand and supply uncertainties, TOU retail pricing results in higher meeting of demand, higher expected revenues for the energy firms and higher utilization of non-renewable supply. Our experiments also indicate that fall in prices that occurs as a consequence of increasing share of renewable energy is lesser in TOU pricing compared to fixed pricing, which makes it less disadvantageous to existing non-renewable energy suppliers and potential investments in non-renewable energy. Through these results and arguments we conclude that TOU retail pricing is superior to fixed retail pricing in the context of increasing share of renewable energy, and uncertainties in demand and supply.