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The Efficiency of Dynamic Electricity Prices

Author

Listed:
  • Andrew J. Hinchberger
  • Mark R. Jacobsen
  • Christopher R. Knittel
  • James M. Sallee
  • Arthur A. van Benthem

Abstract

The marginal cost of electricity fluctuates hour-by-hour, yet retail customers typically face flat prices. Using data from all seven US wholesale markets and a new method to evaluate alternative rates set in advance that accounts for equilibrium price effects, we estimate efficiency gains from time-varying price schedules that better align price with cost. We have three main results. First, time-of-use rates and critical-peak pricing, the two most common time-varying rate plans, each correct about 10% of mispricing. Second, complex rate structures based on historical prices often backfire. Third, real-time pricing with price ceilings can capture most potential efficiency gains.

Suggested Citation

  • Andrew J. Hinchberger & Mark R. Jacobsen & Christopher R. Knittel & James M. Sallee & Arthur A. van Benthem, 2024. "The Efficiency of Dynamic Electricity Prices," CESifo Working Paper Series 11355, CESifo.
    • Handle: RePEc:ces:ceswps:_11355
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    References listed on IDEAS

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    1. Severin Borenstein & James B. Bushnell, 2022. "Do Two Electricity Pricing Wrongs Make a Right? Cost Recovery, Externalities, and Efficiency," American Economic Journal: Economic Policy, American Economic Association, vol. 14(4), pages 80-110, November.
    2. Tim Schittekatte & Dharik Mallapragada & Paul L. Joskow & Richard Schmalensee, 2024. "Electricity Retail Rate Design in a Decarbonizing Economy: An Analysis of Time-of-use and Critical Peak Pricing," The Energy Journal, , vol. 45(3), pages 25-56, May.
    3. Natalia Fabra & David Rapson & Mar Reguant & Jingyuan Wang, 2021. "Estimating the Elasticity to Real-Time Pricing: Evidence from the Spanish Electricity Market," AEA Papers and Proceedings, American Economic Association, vol. 111, pages 425-429, May.
    4. Hogan, William W, 2002. "Electricity Market Restructuring: Reforms of Reforms," Journal of Regulatory Economics, Springer, vol. 21(1), pages 103-132, January.
    5. Scott P. Burger, Christopher R. Knittel, Ignacio J. Perez-Arriaga, Ian Schneider, and Frederik vom Scheidt, 2020. "The Efficiency and Distributional Effects of Alternative Residential Electricity Rate Designs," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
    6. Stephen P. Holland & Erin T. Mansur, 2006. "The Short-Run Effects of Time-Varying Prices in Competitive Electricity Markets," The Energy Journal, , vol. 27(4), pages 127-156, October.
    7. Scott P. Burger & Christopher R. Knittel & Ignacio J. Perez-Arriaga & Ian Schneider & Frederik vom Scheidt, 2020. "The Efficiency and Distributional Effects of Alternative Residential Electricity Rate Designs," The Energy Journal, , vol. 41(1), pages 199-240, January.
    8. Ahmad Faruqui & Sanem Sergici, 2010. "Household response to dynamic pricing of electricity: a survey of 15 experiments," Journal of Regulatory Economics, Springer, vol. 38(2), pages 193-225, October.
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    Cited by:

    1. Lin, Fangsen & Wang, Peng & Ding, Yihong & Wu, Jiaqi & Cao, Yujie, 2025. "A non-cooperative game theory-based time-of-use tariffs joint optimization mechanism considering synergy of multiple provincial power grids under regional coordinated development strategy," Energy, Elsevier, vol. 322(C).

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    Keywords

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    JEL classification:

    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L97 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Utilities: General
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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