The Spillover Effect of Peak Pricing: Overreaction Due to Cognitive Strain

Understanding consumer behaviours is important in designing dynamic tariffs, which are usually considered the first-best solution when the conventional flat tariff does not reflect the varying cost of electricity generation. I estimate households’ own- and cross-price elasticities using dataset from a smart metering project, and investigate which household specific characteristics determine the impact of peak prices on electricity consumption. I find peak prices (17:00–20:00) reduce peak and post-peak consumption (20:00–23:00), indicating a spillover effect of peak prices. The underlying mechanisms that could be generating the spillover effect have been further discussed and investigated. Finally, I estimate dynamic tariffs’ distributional and welfare effects, and demonstrate that the spillover effect is crucial in determining the cost effectiveness of a smart metering programme.