On the rationality of electricity consumers

June 29, 2021 Energy

To balance in real time electrical systems that are increasingly fed by non-dispatchable production sources, we heavily rely on the rational reaction of consumers to market prices. But are we asking too much of them?

The whims of demand

Faced with the development of production units dependent on sunshine and wind speed, power system operators must balance injections and withdrawals mainly by resorting to supply-side solutions: overinvestment in controllable capacity (hydro, nuclear, thermal), interconnections and batteries. Keeping track of versatile demand in real time is therefore very costly, especially since the versatility of final consumers is also strongly dictated by weather conditions, which are often uncorrelated with those prevailing at generation nodes. So, why not save production and transmission capacities of electrical energy by pushing consumers to adapt to scarcity signals conveyed by prices on wholesale markets (see here) and by distributors' time slots (see here)? It is widely accepted that renting an apartment or a house on the Mediterranean coast is more expensive in the summer than during winter, and the opposite in the Alps. The shaving of peak demand by price increases is also commonly practiced by air and land transport companies. So why should we charge the same price for kWh consumed on August 15 as for those drawn at 7pm in February? A rational consumer knows where his interest lies. By signing a contract with a price indexed to wholesale prices, which is called dynamic pricing, consumers will necessarily reduce their consumption when the price is high and increase it in the opposite case. But is the electricity consumer rational? Are we dealing with a homo economicus?

Knowledge, Will, Power

The rationality of the consumer is based on the Knowledge-Will-Power (KWP) triptych. Knowing how the price of a kWh will evolve during the next day is very easy today. But willing to modify one's consumption by using this information is much more complicated. First, because of the costs generated by this monitoring: electricity consumption is continuous throughout the day, whereas renting a place to stay or buying plane tickets is episodic. In addition, energy only accounts for one-third of the electricity bill, with the rest going to transmission and taxes. The net gain from subscribing to a dynamic tariff is therefore only substantial for large industrial and commercial consumers. Finally, one must be able to adapt, which implies either being present at the place of consumption, or having devices that can be remotely controlled and that are likely to provide sufficient energy performance to justify the cost of their installation. This last condition brings us back to the KWP triptych, this time at the stage of acquiring the devices to be installed at the place of consumption.

Errare humanum est

The rational consumer is thus a rare character, who is rarely found except in micro-economic models and, at most, among the employees of the purchasing departments of electro-intensive companies. Lawyers are less demanding: they only ask the consumer to be "normally informed and reasonably attentive and advised, with regard to a good or a service" (article L.121-1 of the consumer code). What behavior to expect from this "average consumer"?

In 2018, Engie offered a 30% discount on electricity on weekends (from Friday midnight to Sunday midnight), accessible for any type of meter. On reading this last mention, the rational consumer laughs because he knows that there are still "non-smart" meters, which simply accumulate consumption over several months and therefore are simply unable to measure the weekend extractions to apply the promised reduction. This commercial proposal is then perceived as a mistake, or even a deceptive or unfair practice, and rational consumers won’t consider it. But the average consumer does not have the necessary knowledge about meters. They may be baited into taking out a contract that is not for them. This is what the Paris Court of Justice considered (January 26, 2021), following a complaint of the association 'Consommation, Logement et Cadre de Vie'. However, if this imperfectly rational consumer had continued his exploration of the 'Elec Weekend' offer, after a few clicks he would have come across the explicit mention "thanks to the Linky meter", in contradiction with "accessible for any type of meter". In other words, we are more in the field of the error of drafting than in that of the will to deceive.

During his exploration, the average consumer was also informed that the 30% reduction also applied 'During the week: according to the schedules fixed locally by the manager of the public distribution network according to the operating conditions of the network'. The Court considered that there was here a 'deficit of intelligibility of information' because if one is not a rational consumer, one does not necessarily know that it is necessary to consult the site of Enedis to know the applicable off-peak hours in each municipality.

If, in the eyes of consumer associations and the courts, the electricity consumer is this unwise and ill-informed, it is hard to imagine that he can juggle with the wholesale prices to orient his hourly consumption.

The CRE and dynamic pricing

Reading the deliberation of the French Energy Regulatory Commission (CRE) on May 20, 2021, it is clear that the CRE shares these fears. The European Directive 2019/944 of June 5, 2019 provides for the mandatory implementation of electricity offers with dynamic pricing (directive transposed into Article L. 332-7 of the Energy Code). After consultation with industry players, while insisting on the social utility of contracts indexed to wholesale prices, CRE recommends great caution in the development of this type of offer, particularly in terms of information. Before any commitment is made, the interested consumer must be explicitly informed that no one can tell her or him the amount of the future bill, since the amount to be paid will depend on her or his behavior in the face of fluctuating prices.

It is still necessary to be flexible. In our latitudes, the consumption peaks are in winter. It is therefore not advisable for consumers with electric heating to sign a contract with dynamic pricing, unless they have a backup wood or gas heater. The CRE therefore insists that "these dynamic pricing offers are not intended to be developed on a massive scale, since they are intended for the most flexible consumers". The wisdom of this principle is matched only by its vagueness. We can already foresee that after periods of tension on the wholesale markets, electricity suppliers will face numerous complaints from subscribers who, upon receiving their bill, will complain that the results do not match the promises made by the sellers. To avoid too many unpleasant surprises, the CRE provides a monthly limit on the energy bill equal to twice the monthly bill that the consumer would have paid at the regulated base rate. This measure has the merit of limiting the risk borne by the consumer, in particular to avoid the astronomical bills of the Texas winter. Nevertheless, it is not clear that this clause, which is meant to be reassuring, is a great incentive since the consumer who hopes to see his bill go down learns that it is not impossible that it is multiplied by two.



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Behavioral economics, which has developed steadily over the past twenty years, has provided the consumer associations, the courts and the regulators with much-needed input. Homo economicus remains an essential element of analysis, but homo electricus is imperfectly economicus. We must therefore monitor and protect him, at least in extreme situations, without, however, interfering too much with his free will. The price signal must play a primary role in our decisions, but it must not saturate our cognitive space. Suppliers who offer dynamic pricing contracts should provide, in addition to price announcements, a simple information system, for example by identifying time slots with colors. Along this line the Tempo offer, by EDF, may not have been such a bad idea.