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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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Cited by:
  1. C. Woo & J. Zarnikau & E. Kollman, 2012. "Exact welfare measurement for double-log demand with partial adjustment," Empirical Economics, Springer, vol. 42(1), pages 171-180, February.
  2. Herter, Karen, 2007. "Residential implementation of critical-peak pricing of electricity," Energy Policy, Elsevier, vol. 35(4), pages 2121-2130, April.
  3. Léautier, Thomas-Olivier, 2012. "Is mandating "smart meters" smart?," TSE Working Papers 12-341, Toulouse School of Economics (TSE).
  4. Claire Bergaentzlé & Cédric Clastres & Haikel Khalfallah, 2014. "Demand-side management and European environmental and energy goals: an optimal complementary approach," Post-Print halshs-00928678, HAL.
  5. Adela Conchado & Pedro Linares, 2010. "The Economic Impact of Demand-Response Programs on Power Systems. A survey of the State of the Art," Working Papers 02-2010, Economics for Energy.
  6. Rodrigues, Renato & Linares, Pedro & Gómez-Plana, Antonio G., 2011. "A CGE Assessment of the Impacts on Electricity Production and CO2 Emissions of a Residential Demand Response Program in Spain/Impacto sobre la producción eléctrica y emisiones de CO2 de un programa ," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 29, pages 665 (36 pag, Agosto.
  7. Friedman, Lee S., 2011. "The importance of marginal cost electricity pricing to the success of greenhouse gas reduction programs," Energy Policy, Elsevier, vol. 39(11), pages 7347-7360.
  8. Richard Green, 2010. "Energy Regulation in a Low Carbon World," Discussion Papers 10-16, Department of Economics, University of Birmingham.
  9. Walawalkar, Rahul & Blumsack, Seth & Apt, Jay & Fernands, Stephen, 2008. "An economic welfare analysis of demand response in the PJM electricity market," Energy Policy, Elsevier, vol. 36(10), pages 3692-3702, October.
  10. Wai Choi & Anindya Sen & Adam White, 2011. "Response of industrial customers to hourly pricing in Ontario’s deregulated electricity market," Journal of Regulatory Economics, Springer, vol. 40(3), pages 303-323, December.
  11. Claire Bergaentzlé & Cédric Clastres, 2013. "Tarifications dynamiques et efficacité énergétique : l'apport des Smart Grids," Post-Print halshs-00822731, HAL.
  12. Torriti, Jacopo, 2013. "The significance of occupancy steadiness in residential consumer response to Time-of-Use pricing: Evidence from a stochastic adjustment model," Utilities Policy, Elsevier, vol. 27(C), pages 49-56.
  13. Serra, Pablo, 2013. "Contract market power and its impact on the efficiency of the electricity sector," Energy Policy, Elsevier, vol. 61(C), pages 653-662.
  14. Paul L. Joskow, 2012. "Creating a Smarter U.S. Electricity Grid," Journal of Economic Perspectives, American Economic Association, vol. 26(1), pages 29-48, Winter.
  15. Boom, Anette & Schwenen, Sebastian, 2012. "Real-time Pricing in Power Markets: Who Gains?," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 66062, Verein für Socialpolitik / German Economic Association.
  16. Kopsakangas Savolainen, Maria & Svento, Rauli, 2012. "Real-Time Pricing in the Nordic Power markets," Energy Economics, Elsevier, vol. 34(4), pages 1131-1142.
  17. Grohnheit, Poul Erik & Andersen, Frits Møller & Larsen, Helge V., 2011. "Area price and demand response in a market with 25% wind power," Energy Policy, Elsevier, vol. 39(12), pages 8051-8061.
  18. Allcott, Hunt, 2011. "Rethinking real-time electricity pricing," Resource and Energy Economics, Elsevier, vol. 33(4), pages 820-842.
  19. Bergaentzlé, Claire & Clastres, Cédric & Khalfallah, Haikel, 2014. "Demand-side management and European environmental and energy goals: An optimal complementary approach," Energy Policy, Elsevier, vol. 67(C), pages 858-869.
  20. Bushnell, James, 2010. "Building Blocks: Investment in Renewable and Non-Renewable Technologies," Staff General Research Papers 31546, Iowa State University, Department of Economics.
  21. De Jonghe, C. & Hobbs, B. F. & Belmans, R., 2011. "Integrating short-term demand response into long-term investment planning," Cambridge Working Papers in Economics 1132, Faculty of Economics, University of Cambridge.

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