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The Long-Run Efficiency of Real-Time Electricity Pricing

Severin Borenstein

Year: 2005
Volume: Volume 26
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol26-No3-5
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Abstract:
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.



The Short-Run Effects of Time-Varying Prices in Competitive Electricity Markets

Stephen P. Holland and Erin T. Mansur

Year: 2006
Volume: Volume 27
Number: Number 4
DOI: 10.5547/ISSN0195-6574-EJ-Vol27-No4-6
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Abstract:
We analyze the efficiency, distributional, and environmental effects of real-time pricing (RTP) adoption in the short run. Consistent with theory, our simulations of the PJM electricity market show that RTP adoption improves efficiency and compresses the distributions of loads and prices. Adoption increases average load but decreases operating profits with the largest decrease for oil-fired generation (59% when all customers adopt). Consumer surplus and welfare gains are modest (2.5% and 0.24% of the energy bill), and emissions of SO2 and NOx increase but CO2 emissions decrease. Approximately 30% of these efficiency gains could be captured by varying flat rates monthly instead of annually. Monthly flat rate adjustment has many of the same effects as RTP adoption, captures more of the deadweight loss than time of use (TOU) rates, and requires no new metering technology.



Customer Response to RTP in Competitive Markets: A Study of Niagara Mohawk's Standard Offer Tariff

Richard N. Boisvert, Peter Cappers, Charles Goldman, Bernie Neenan  and Nicole Hopper

Year: 2007
Volume: Volume 28
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol28-No1-3
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Abstract:
Utilizing load, price, and survey data for 119 large customers that paid competitively determined hourly electricity prices announced the previous day between 2000 and 2004, this study provides insight into the factors that determine the intensity of price response. Peak and off-peak electricity can be: perfect complements, substitutes, or substitutes where high peak prices cause temporary disconnection from the grid, as for some firms with on-site generation. The average elasticity of substitution is 0.11. Thirty percent of the customers use peak and off-peak electricity in fixed proportions. The 18% with elasticities greater than 0.10 provide 75% of the aggregate price response. In contrast to Industrial customers, Commercial/Retail and Government/Education customers are more price responsive on hot days and when the ratio of peak to off-peak prices is high. Price responsiveness is not substantially reduced when customers operate near peak usage. Diversity of customer circumstances and price response suggest dynamic pricing is suited for some, but not all customers.



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

Severin Borenstein

Year: 2007
Volume: Volume 28
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol28-No2-5
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Abstract:
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.



Wealth Transfers Among Large Customers from Implementing Real-Time Retail Electricity Pricing

Severin Borenstein

Year: 2007
Volume: Volume 28
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol28-No2-6
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Abstract:
Adoption of real-time electricity pricing�retail prices that vary hourly to reflect changing wholesale prices removes existing cross-subsidies to those customers that consume disproportionately more when wholesale prices are highest. If their losses are substantial, these customers are likely to oppose RTP initiatives unless there is a supplemental program to offset their loss. Using data on a sample of 1142 large industrial and commercial customers in northern California, I show that RTP adoption would result in significant transfers compared to a flat-rate tariff. When compared to the time-of-use rates (simple peak/offpeak tariffs) that these customers already face, however, the transfers drop by up to 45%; even under the more extreme price volatility scenario that I examine, 90% of customers would see changes of between a 4% bill reduction and an 8% bill increase. Though customer price responsiveness reduces the loss incurred by those with high-cost demand profiles, I also demonstrate that this offsetting effect is unlikely to be large enough for most customers with costly demand patterns to completely offset their lost cross-subsidy. The analysis suggests that adoption of real-time pricing may be difficult without a supplemental program that compensates the customers who are made worse off by the change. I examine possible �two-part RTP� programs, which allow customers to purchase a baseline quantity at regulated TOU rates, and show they can be used to greatly reduce the transfers associated with adoption of RTP.



Impacts of Responsive Load in PJM: Load Shifting and Real Time Pricing

Kathleen Spees and Lester Lave

Year: 2008
Volume: Volume 29
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol29-No2-6
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Abstract:
Load Shifting and Real Time Pricing Kathleen Spees* and Lester Lave** In PJM, 15% of electric generation capacity ran less than 96 hours, 1.1% of the time, over 2006. If retail prices reflected hourly wholesale market prices, customers would shift consumption away from peak hours and installed capacity could drop. We use PJM data to estimate consumer and producer savings from a change toward real-time pricing (RTP) or time-of-use (TOU) pricing. Surprisingly, neither RTP nor TOU has much effect on average price under plausible short-term consumer responses. Consumer plus producer surplus rises 2.8%-4.4% with RTP and 0.6%-1.0% with TOU. Peak capacity savings are seven times larger with RTP. Peak load drops by 10.4%-17.7% with RTP and only 1.1%-2.4% with TOU. Half of all possible customer savings from load shifting are obtained by shifting only 1.7% of all MWh to another time of day, indicating that only the largest customers need be responsive to get the majority of the short-run savings.





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