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

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.

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

JEL Codes: Q54: Climate; Natural Disasters and Their Management; Global Warming, Q53: Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling, L11: Production, Pricing, and Market Structure; Size Distribution of Firms, Q42: Alternative Energy Sources, Q41: Energy: Demand and Supply; Prices

Keywords: Electricity prices, real-time-pricing (RTP), TOU policy, competition, welfare

DOI: 10.5547/ISSN0195-6574-EJ-Vol27-No4-6


Published in Volume 27, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.