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 find peak prices (17:00-20:00) reduce peak and post-peak consumption (20:00-23:00), indicating a spillover effect of peak prices. Further investigation demonstrates that the spillover effect is due to overreaction due to households’ cognitive strain when making consumption decisions. This is especially true when they are facing unfamiliar events, which in my case refers to when the own-price in the period deviating from the base rate that households usually pay. I also estimate dynamic tariffs’ distributional and welfare effects. I demonstrate that the spillover effect is crucial in determining the cost effectiveness of a smart metering programme