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On the Efficiency of Competitive Electricity Markets with Time-Invariant Retail Prices

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Author Info
Severin Borenstein () (University of California Energy Institute and University of California at Berkeley)
Stephen Holland () (University of North Carolina at Greensboro)

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Abstract

Most customers in electricity markets do not face prices that change frequently to reflect changes in wholesale costs, known as real-time pricing (RTP). We show that not only does time-invariant pricing in competitive markets lead to prices and investment that are not first best, it even fails to achieve the constrained second-best optimum. Increasing the share of customers on RTP is likely to improve efficiency, though surprisingly it does not necessarily reduce capacity investment, and it is likely to harm customers that are already on RTP. Simulations demonstrate that the efficiency gains from RTP are potentially quite significant. Ordering information: This article can be ordered from https://pubs3.rand.org/cgi-bin/rje/pdf.cgi.

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Publisher Info
Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 36 (2005)
Issue (Month): 3 (Autumn)
Pages: 469-493
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Handle: RePEc:rje:randje:v:36:y:2005:3:p:469-493

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  1. Joskow, Paul & Tirole, Jean, 2004. "Retail Electricity Competition," IDEI Working Papers 311, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
    Other versions:
  2. Anette Boom & Stefan Buehler, 2007. "Restructuring Electricity Markets when Demand is Uncertain: Effects on Capacity Investments, Prices and Welfare," CIE Discussion Papers 2007-09, University of Copenhagen. Department of Economics. Centre for Industrial Economics. [Downloadable!]
  3. Stephen P. Holland & Erin T. Mansur, 2007. "Is Real-Time Pricing Green? The Environmental Impacts of Electricity Demand Variance," NBER Working Papers 13508, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Joskow, P. & Tirole, J., 2004. "Reliability and Competitive Electricity Markets," Cambridge Working Papers in Economics 0450, Faculty of Economics, University of Cambridge. [Downloadable!]
    Other versions:
  5. Chidmi, Benaissa & Lopez, Rigoberto A. & Cotterill, Ronald W., 2004. "Retail Oligopoly Power, Dairy Compact, And Boston Milk Prices," Research Reports 25212, University of Connecticut, Food Marketing Policy Center. [Downloadable!]
  6. Anna Creti & Natalia Fabra, 2003. "Capacity Markets for Electricity," Industrial Organization 0309002, EconWPA, revised 26 Nov 2003. [Downloadable!]
  7. Severin Borenstein, 2006. "Customer Risk from Real-Time Retail Electricity Pricing: Bill Volatility and Hedgability," NBER Working Papers 12524, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Claude Crampes & Michel Moreaux, 2009. "Pumped storage and energy saving," Working Papers 09.17.293, LERNA, University of Toulouse. [Downloadable!]
  9. Steven J. Davis & Cheryl Grim & John Haltiwanger & Mary Streitwieser, 2008. "Electricity Pricing to U.S. Manufacturing Plants, 1963-2000," NBER Working Papers 13778, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Anette Boom, 2007. "Vertically Integrated Firms' Investments in Electricity Generating Capacities," CIE Discussion Papers 2007-14, University of Copenhagen. Department of Economics. Centre for Industrial Economics. [Downloadable!]
    Other versions:
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