Tail-risk in real-time electricity pricing: Experimental evidence on preferences, perception and comprehension

Abstract

Do households comprehend the nature of tail-risks inherent to real-time electricity pricing (RTP) plans? We develop a randomized and incentivized experiment calibrated to real-world price distributions and find that (a) probabilistic risk disclosure, beyond that offered in standard marketing materials, elicits greater demand for real-time pricing products relative to a low-risk fixed-price alternative, (b) products with tail-risk protection might not be highly sought, and (c) the experience of a RTP bill shock drives choice away from RTP. Personal experience receiving a tail price plays a greater role in risk comprehension and moving subsequent choices toward less risky plans than receipt of an additional ex-ante probabilistic risk disclosure. We discuss the implications these findings may have for regulators with a consumer protection mandate.