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Customer Risk from Real-Time Retail Electricity Pricing: Bill Volatility and Hedgability

One of the most critical concerns that customers have voiced in the debate over real-time retail electricity pricing is that they would be exposed to risk from fluctuations in their electricity cost. The concern seems to be that a customer could find itself consuming a large quantity of power on the day that prices skyrocket, resulting in a high monthly bill. I analyze the magnitude of this risk, using demand data from 1142 large industrial customers, and then ask how much of this risk can be eliminated through various straightforward financial instruments. I find that very simple hedging strategies�forward purchase contracts that are already used with many RTP programs�can eliminate more than 80% of the bill volatility that would otherwise occur. I then show that a slightly more sophisticated application of these forward power purchases can significantly enhance their effect on reducing bill volatility.

Purchase ( $25 )

Energy Specializations: Energy Modeling – Energy Data, Modeling, and Policy Analysis; Electricity – Markets and Prices

JEL Codes:
E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
D42 - Market Structure, Pricing, and Design: Monopoly

Keywords: Real time electricity pricing (RTP), bill volatility, risk, hedging, California

DOI: 10.5547/ISSN0195-6574-EJ-Vol28-No2-5

Published in Volume 28, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.