Public preferences and increasing acceptance of time-varying electricity pricing for demand side management in South Korea

Highlights

• Residential electricity consumers are less likely to opt for TOU in South Korea.

• We used discrete choice experiment to investigate preferences for TOU pricing.

• Consumers prefer a TOU tariff plan that minimizes uncertainty.

• The design of TOU electricity tariffs should consider consumer preferences.

Abstract

Linking demand and supply management on the basis of public acceptance is essential to prepare for the energy transition from fossil fuels to environment friendly energy integration, and to ensure stability in electricity supply and demand management. Demand management could promote the conservation of energy resources by stabilizing electricity supplies and curbing consumer consumption, which could consequently help reduce capital expenditures. Major developed countries have improved the efficiency of electric facility operations by implementing demand management based on pricing programs. The Korean government also seeks to improve demand management by introducing time-of-use (TOU) tariffs to residential electricity consumers. However, the rate of residential customers switching to the TOU tariff in Korea is still low, which negatively affects the success of demand management. Accordingly, this study aims to consider the preference structure of residential electricity consumers for TOU pricing using a discrete choice experiment, and further derive policy implications to promote the pricing program's switching rate. The analysis of consumer preferences in this study shows that consumers prefer a TOU tariff plan that minimizes uncertainty. Therefore, it is necessary to provide consumers with information on their consumption amounts and usage patterns based on real-time metering to reduce consumer uncertainties. In conjunction with the findings from the scenario analysis on the choice probability of TOU tariffs, incentives such as subsidies for purchasing high-efficiency appliances and carbon points are an effective measure to lower the barrier to switching, and reduce additional utility expenses. Furthermore, diversifying tariff plan attributes is required in subsequent studies on public acceptance to accurately identify consumer preferences while considering the TOU tariff plan's rate of diffusion.

Introduction

Linking demand-side management and supply management helps prepare for the transition to environment friendly energy sources. Demand management, which is the counter concept to supply management, includes all activities aimed at satisfying consumers' demand for electricity at the lowest cost by deviating from their current electricity consumption patterns in response to changes in the price of electricity (Chiu et al., 2009). Therefore, demand management can promote the conservation of energy resources by stabilizing electricity supplies and curbing consumer consumption, which can further help reduce capital expenditures (Kostková et al., 2013). In the case of South Korea (i.e., this study's target market), demand management was considered an important alternative for optimal electricity supply at the lowest price because capital expenditures for power generation increased significantly during the rapid economic growth in the 1980s. Additionally, in 1973, the U.S. initially introduced demand management to address the oil crisis, which resulted from an embargo by Arab oil-producing countries (Apergis and Payne, 2010).

Electricity demand management can be broadly divided into price-based and load-management programs that provide equipment and incentive-based programs. Price-based demand management is the most rational and efficient measure adopted to achieve the goal of demand management. Furthermore, it is an indirect measure of voluntarily changing electricity consumption behavior of consumers to reduce household electricity expenditure. Particularly, critical-peak pricing (CPP), time-of-use (TOU) pricing, and real-time pricing (RTP) have been introduced as price-based demand management measures (Borenstein and Holland, 2005; Skiera and Spann, 1999; Vickrey, 1971). When a higher unit price is applied during high electricity demand hours and a lower unit price is applied during lower demand hours, consumers can plan their usage accordingly. Consequently, electricity demand can be effectively distributed.

Major foreign countries have improved the efficiency of their electric facility operations by implementing demand management based on pricing programs. In the U.S., electricity tariffs vary by state, and most consumers use the TOU rate (seasonal or time of day). For residential customers in particular, many types of complex pricing exist, such as TOU tariffs integrated with progressive pricing and TOU-only tariffs (e.g., Pacific Gas and Electric, 2022). Additionally, Électricité de France (EDF) offers various time-varying pricing programs, including RTP, TOU, variable peak-load tariffs, and CPP (EDF, 2017). Similarly, British Gas, the private electricity supplier with the largest share of the U.K. electricity market, offers a standard variable tariff based on wholesale prices and market conditions, a fixed tariff for contract terms, and a time-varying tariff (Ofgem, 2001). Finally, E. ON, one of the four largest electricity suppliers in Germany, has two-tier progressive tariffs based on an annual consumption of 7,000 kWh, and offers a tariff for using electricity from renewable energy sources separately.

In South Korea, the scope of tariffs has gradually expanded since its initial introduction to a portion of industrial electricity consumers in December 1977. Nevertheless, the TOU tariffs were not introduced to residential consumers until 2020; instead, collective progressive tariffs were applied, with charges increasing differently depending on monthly consumption. However, collective progressive tariffs became a critical social issue in South Korea when considerable high electricity bills increased further owing to the record-breaking heat wave in the summer of 2016. Since then, negative public perceptions of progressive tariffs have persisted. Moreover, expanding the share of renewable energy in the power generation sector to meet the greenhouse gas reduction and carbon neutrality targets entails an increase in generation costs and additional factors that increase the price of electricity. In particular, the imbalance between supply and demand and power grid problems, such as transmission constraints and congestion, mainly caused by the variability and intermittency of renewable energy, are directly related to the increase in electricity prices. Under these circumstances, the Korean government proposed a plan in 2019 to expand TOU tariffs for residential electricity consumers to further alleviate the negative public perception of progressive tariffs and reinforce demand-side management based on a pricing program (Ministry of Trade, Industry, and Energy, 2019).

Subsequently, in September 2021, Korea Electric Power Corporation (KEPCO), which is responsible for the generation, transmission, and distribution of electricity in South Korea, introduced optional TOU tariffs for residential electricity consumers in the Jeju region. The corporation aims to expand the introduction of optional TOU tariffs to the entire country from, 2022 (Ministry of Trade, Industry, and Energy, 2021). Accordingly, the Korean government seeks to improve the efficiency of electric facility operations and expand the tariff options of residential consumers. However, the number of residential consumers transferring from the progressive tariff to the newly introduced TOU is quite limited, meaning that it differs from the original plan of the Korean government. Without voluntary transfer of residential electricity consumers, demand management based on price programs will lose considerable momentum. Notably, consumers are likely to experience difficulty in identifying their own consumption patterns and choosing the appropriate tariff because government regulations have maintained a uniform tariff system in South Korea. Therefore, it is necessary to investigate the causes of TOU tariff's low switching rate (less than 1%) from the consumer's perspective, and to establish practical strategies to increase the switching rate.

Accordingly, this study aims to consider the preference structure of residential electricity consumers for the TOU pricing program using a discrete choice experiment, and further suggests meaningful strategies to improve the pricing program's switching rate based on the estimation results. This paper proceeds as follows: Section 2 reviews the existing literature that has examined load transfer effects by introducing new electricity tariffs and consumer preferences depending on the type of new tariff introduced. Section 3 discusses the discrete choice experiment and the mixed logit model used in this study's empirical analysis. Section 4 examines consumer preferences for the TOU pricing program and predicts the probability of choosing between the existing progressive tariff and TOU tariff under different scenarios. Section 5 further proposes various strategies to promote demand management based on pricing programs from consumers' perspective, based on the estimation results.