Customer Risk from Real-Time Retail Electricity Pricing: Bill Volatility and Hedgability
One of the most critical concerns that customers have voiced in the debate over real-time retail electricity pricing is that they would be exposed to risk from fluctuations in their electricity cost. The concern seems to be that a customer could find itself consuming a large quantity of power on the day that prices skyrocket, resulting in a high monthly bill. I analyze the magnitude of this risk, using demand data from 1142 large industrial customers, and then ask how much of this risk can be eliminated through various straightforward financial instruments. I find that very simple hedging strategiesÑforward purchase contracts that are already used with many RTP programsÑcan eliminate more than 80% of the bill volatility that would otherwise occur. I then show that a slightly more sophisticated application of these forward power purchases can significantly enhance their effect on reducing bill volatility.
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Volume (Year): Volume 28 (2007)
Issue (Month): Number 2 ()
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- Gregory W. Brown & Klaus Bjerre Toft, 2002. "How Firms Should Hedge," Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1283-1324.
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13133, Iowa State University, Department of Economics.
- Christopher Knittel & Catherine Wolfram & James Bushnell & Severin Borenstein, 2006. "Inefficiencies and Market Power in Financial Arbitrage: A Study of California’s Electricity Markets," Working Papers 630, University of California, Davis, Department of Economics.
- Ronald I. McKinnon, 1967. "Futures Markets, Buffer Stocks, and Income Stability for Primary Producers," Journal of Political Economy, University of Chicago Press, vol. 75, pages 844.
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- Severin Borenstein & Stephen P. Holland, 2003. "On the Efficiency of Competitive Electricity Markets With Time-Invariant Retail Prices," NBER Working Papers 9922, National Bureau of Economic Research, Inc.
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