This paper quantifies the potential gross welfare gains from introducing real-time retail pricing (RTP) for different carbon taxes and variable renewable energy market penetration rates. It investigates this using a stylized electricity market model which mimics a competitive wholesale and retail market with exogenous shares of real-time and flat-priced consumers.

Regulators, academia and practitioners are interested in the potential role that price-responsive demand can play in accommodating a high proportion of variable renewable electricity supply. Several jurisdictions in the U.S. and Europe with different renewable supply shares have started to roll out advanced metering infrastructure on a large scale, or are planning to do so. This will allow consumers to receive and respond to price signals in real time. However it is unclear at what stage of renewable market penetration the efficiency gains from these price signals are likely to outweigh the high upfront costs of advanced metering infrastructure and the transaction costs.

This paper analyzes how and why the gross welfare gains from implementing real-time pricing could change under increasing carbon emissions taxation and growing variable renewable supply shares. It finds that the benefits of introducing real-time pricing do not increase linearly. Accordingly, net benefits of rolling out advanced meters may only materialize at relatively high renewable energy shares.

The model is calibrated to German market data using long-run projections about technology-specific cost parameters. It includes a comparative static welfare analysis of varying RTP consumer shares, carbon taxes and renewable supply shares in total annual electricity supply. The research adopts a micro-economic perspective with price-elastic consumers and thus complements techno-economic studies on the effects of increased demand-side flexibility which typically assume demand to be price-inelastic.