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The Long-Run Efficiency of Real-Time Electricity Pricing

Retail real-time pricing (RTP) of electricity � retail pricing that changes hourly to reflect the changing supply/demand balance � is very appealing to economists because it �sends the right price signals.� Economic efficiency gains from RTP, however, are often confused with the short-term wealth transfers from producers to consumers that RTP can create. Abstracting from transfers, I focus on the long-run efficiency gains from adopting RTP in a competitive electricity market. Using simple simulations with realistic parameters, I demonstrate that the magnitude of efficiency gains from RTP is likely to be significant even if demand shows very little elasticity. I also show that �time-of-use� pricing, a simple peak and off-peak pricing system, is likely to capture a very small share of the efficiency gains that RTP offers.

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Energy Specializations: Electricity – Markets and Prices ; Electricity – Policy and Regulation; Energy Access – Energy Poverty and Equity

JEL Codes:
D42 - Market Structure, Pricing, and Design: Monopoly
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
Q56 - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

Keywords: Electricity, real-time pricing (RTP), time-of-use pricing (TOU), welfare

DOI: 10.5547/ISSN0195-6574-EJ-Vol26-No3-5

Published in Volume 26, Number 3 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.