The role of service charges in the application of priority service pricing

Abstract

Residential demand response is poised to emerge as an increasingly important aspect of power market operations. A major challenge in the proliferation of residential demand response relates to the development of scalable aggregator business models. This has motivated quality differentiation in the form of priority service. Priority service consists of a priority charge, which is payable regardless of the usage of electricity, and a service charge, which is payable only when electricity is actually consumed. In this paper, we analyze the role of service charges in priority service pricing. From a theoretical standpoint, we characterize service charges that maintain the equivalence between priority service and real-time pricing in terms of consumer expenditures. We also revisit the results of the traditional theory regarding a finite number of priority service classes for the general case of non-zero service charges. The experimental side of the paper is focused on the comparison of different priority service settings in terms of their impact on consumer comfort and electricity bills. The analysis is performed on a realistic case study of a Texas household using the Pecan Street database and on a Belgian household using the LINEAR database. The results reveal that service charges are crucial for the viable practical implementation of priority service pricing. We use our case study to further analyze the incentives of households in a priority service pricing regime.