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The Long-Run Efficiency of Real-Time Electricity Pricing

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  • Severin Borenstein

Abstract

Retail real-time pricing (RTP) of electricity Ð retail pricing that changes hourly to reflect the changing supply/demand balance Ð is very appealing to economists because it Òsends the right price signals.Ó 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 Òtime-of-useÓ 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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Bibliographic Info

Article provided by International Association for Energy Economics in its journal The Energy Journal.

Volume (Year): Volume 26 (2005)
Issue (Month): Number 3 ()
Pages: 93-116

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Handle: RePEc:aen:journl:2005v26-03-a05

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