The perils of dynamic electricity pricing tariffs in the presence of retail market imperfections

In this paper, we show that the profit maximizing nature of electricity retailers, combined with boundedly rational customer behavior, might induce physical operational problems for the power grid under dynamic retail pricing. This is because, under certain conditions, retailers will be incentivized to design prices that shift load away from supply, further increasing the demand supply gap. We propose an alternative pricing method, referred to as differentiated pricing, which does not suffer from this issue. Our analysis is based on a simple demand model in order to gain useful insights on the repercussions of ignoring retail market imperfections.