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Customer Risk from Real-Time Retail Electricity Pricing: Bill Volatility and Hedgability

Author

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  • Severin Borenstein

Abstract

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 strategies—forward purchase contracts that are already used with many RTP programs—can 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.

Suggested Citation

  • Severin Borenstein, 2007. "Customer Risk from Real-Time Retail Electricity Pricing: Bill Volatility and Hedgability," The Energy Journal, , vol. 28(2), pages 111-130, April.
    • Handle: RePEc:sae:enejou:v:28:y:2007:i:2:p:111-130
    DOI: 10.5547/ISSN0195-6574-EJ-Vol28-No2-5
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    Cited by:

    1. Cabot, Clément & Villavicencio, Manuel, 2024. "The demand-side flexibility in liberalised power market: A review of current market design and objectives," Renewable and Sustainable Energy Reviews, Elsevier, vol. 201(C).
    2. 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.
    3. Winzer, Christian & Ramírez-Molina, Héctor & Hirth, Lion & Schlecht, Ingmar, 2024. "Profile contracts for electricity retail customers," Energy Policy, Elsevier, vol. 195(C).
    4. Staudt, Philipp & Dann, David, 2025. "Perceived complexity and effectiveness of dynamic electricity rate designs for smart markets," Applied Energy, Elsevier, vol. 394(C).
    5. repec:isu:genstf:201101010800001360 is not listed on IDEAS
    6. Yumi Yoshida & Kenta Tanaka & Shunsuke Managi, 2017. "Which dynamic pricing rule is most preferred by consumers?—Application of choice experiment," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 6(1), pages 1-11, December.
    7. Lo Prete, Chiara & Palmer, Karen & Robertson, Molly, 2025. "Time for a market upgrade? A review of wholesale electricity market designs for the future," Energy Economics, Elsevier, vol. 148(C).
    8. Biggar, Darryl R. & Hesamzadeh, Mohammad Reza, 2024. "Optimal retail contracts with contractible uncertainty," Energy Economics, Elsevier, vol. 136(C).
    9. Lo Prete, Chiara & Palmer, Karen & Robertson, Molly, 2024. "Time for a Market Upgrade? A Review of Wholesale Electricity Market Designs for the Future," RFF Reports 24-09, Resources for the Future.

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    Keywords

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    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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