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

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  • Stephen P. Holland
  • Erin T. Mansur

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.

Suggested Citation

  • Stephen P. Holland & Erin T. Mansur, 2006. "The Short-Run Effects of Time-Varying Prices in Competitive Electricity Markets," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 127-156.
  • Handle: RePEc:aen:journl:2006v27-04-a06
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    Cited by:

    1. Christian Gambardella & Michael Pahle & Wolf-Peter Schill, 2016. "Do Benefits from Dynamic Tariffing Rise? Welfare Effects of Real-Time Pricing under Carbon-Tax-Induced Variable Renewable Energy Supply," Discussion Papers of DIW Berlin 1621, DIW Berlin, German Institute for Economic Research.
    2. Carlo Fezzi & Derek Bunn, 2010. "Structural Analysis of Electricity Demand and Supply Interactions," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 72(6), pages 827-856, December.
    3. Sahraei-Ardakani, Mostafa & Blumsack, Seth & Kleit, Andrew, 2012. "Distributional impacts of state-level energy efficiency policies in regional electricity markets," Energy Policy, Elsevier, vol. 49(C), pages 365-372.
    4. Thomas-Olivier Leautier, 2014. "Is Mandating "Smart Meters" Smart?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4).
    5. 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.
    6. Allcott, Hunt, 2011. "Rethinking real-time electricity pricing," Resource and Energy Economics, Elsevier, vol. 33(4), pages 820-842.
    7. 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.
    8. 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.
    9. Stephen P. Holland & Erin T. Mansur, 2008. "Is Real-Time Pricing Green? The Environmental Impacts of Electricity Demand Variance," The Review of Economics and Statistics, MIT Press, vol. 90(3), pages 550-561, August.
    10. 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.
    11. Claire Bergaentzlé, 2013. "From smart technology to smart consumers: for better system reliability and improved market efficiency," Post-Print halshs-01011169, HAL.
    12. Førsund, Finn R., 2009. "Energy in a Bathtub: Electricity Trade between Countries with Different Generation Technologies," Memorandum 17/2009, Oslo University, Department of Economics.
    13. Clay Campaigne & Shmuel S. Oren, 2016. "Firming renewable power with demand response: an end-to-end aggregator business model," Journal of Regulatory Economics, Springer, vol. 50(1), pages 1-37, August.
    14. 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.
    15. Sahraei-Ardakani, Mostafa & Blumsack, Seth & Kleit, Andrew, 2015. "Estimating zonal electricity supply curves in transmission-constrained electricity markets," Energy, Elsevier, vol. 80(C), pages 10-19.
    16. Maria Kopsakangas-Savolainen & Rauli Svento, 2013. "Promotion of Market Access for Renewable Energy in the Nordic Power Markets," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 54(4), pages 549-569, April.
    17. J. Scott Holladay & Steven Soloway, 2015. "The Environmental Impacts of Fuel Switching Power Plants," Working Papers 2015-05, University of Tennessee, Department of Economics.
    18. 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.
    19. Streimikiene, Dalia & Siksnelyte, Indre, 2016. "Sustainability assessment of electricity market models in selected developed world countries," Renewable and Sustainable Energy Reviews, Elsevier, vol. 57(C), pages 72-82.
    20. Shira Horowitz and Lester Lave, 2014. "Equity in Residential Electricity Pricing," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    21. James Cochell & Peter Schwarz & Thomas Taylor, 2012. "Using real-time electricity data to estimate response to time-of-use and flat rates: an application to emissions," Journal of Regulatory Economics, Springer, vol. 42(2), pages 135-158, October.

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