Measuring the impact of time-of-use pricing on electricity consumption: Evidence from Spain

In this project, we document that Spain's time-of-use (TOU) pricing program for residential electricity successfully reduced consumption during mid- and peak hours, maintaining usage during lower-priced hours. This shift from static to dynamic pricing addresses the challenges of balancing renewable energy supply with fluctuating demand, preventing inefficiencies. TOU pricing, as a predetermined mechanism, can mitigate information constraints and reduce the costs associated with shifting consumption by making prices more transparent and actionable for consumers.In June 2021, Spain introduced a regulatory reform affecting system and network charges, which comprise 50% of electricity bills. Workdays were divided into peak, mid-peak, and off-peak hours, while weekends and holidays were designated as off-peak. We use a Differences-in-Differences (DID) model to document the impact, comparing electricity consumption in Spain with Portugal as the control group. The findings indicate a 9% reduction in consumption during peak hours and evidence of habit formation, as weekend consumption patterns also shifted despite unchanged prices.To refine the analysis, we employed machine learning techniques to allow for more flexible econometric interactions. Pre-treatment data were used to model electricity consumption patterns, generating out-of-sample predictions for the post-treatment period. These predictions were incorporated into the DID analysis to reduce sensitivity to fixed-effect specifications. Results align with behavioral research, showing that predetermined pricing programs enhance consumer awareness, make prices more salient, and elicit stronger household responses.Overall, Spain's program demonstrates the effectiveness of TOU pricing in reshaping consumer behavior, ensuring more efficient electricity use, and supporting the transition to dynamic pricing frameworks aligned with renewable energy goals.