IDEAS home Printed from https://ideas.repec.org/p/ces/ceswps/_11355.html

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
    as

    Download full text from publisher

    File URL: https://www.ifo.de/DocDL/cesifo1_wp11355.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Hogan, William W, 2002. "Electricity Market Restructuring: Reforms of Reforms," Journal of Regulatory Economics, Springer, vol. 21(1), pages 103-132, January.
    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. 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.
    4. repec:aen:journl:ej41-1-burger is not listed on IDEAS
    5. repec:aen:journl:2006v27-04-a06 is not listed on IDEAS
    6. Megan R. Bailey & David P. Brown & Blake C. Shaffer & Frank A. Wolak, 2023. "Show Me the Money! Incentives and Nudges to Shift Electric Vehicle Charge Timing," NBER Working Papers 31630, National Bureau of Economic Research, Inc.
    7. 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.
    8. 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.
    9. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Pretto, Madeline, 2021. "Tail-risk Comprehension and Protection in Real-time Electricity Pricing : Experimental Evidence," Warwick-Monash Economics Student Papers 25, Warwick Monash Economics Student Papers.
    2. Staudt, Philipp & Dann, David, 2025. "Perceived complexity and effectiveness of dynamic electricity rate designs for smart markets," Applied Energy, Elsevier, vol. 394(C).
    3. Nakai, Miwa & von Loessl, Victor & Wetzel, Heike, 2024. "Preferences for dynamic electricity tariffs: A comparison of households in Germany and Japan," Ecological Economics, Elsevier, vol. 223(C).
    4. Leslie, Gordon W. & Pourkhanali, Armin & Roger, Guillaume, 2024. "Is the clean energy transition making fixed-rate electricity tariffs regressive?," Journal of Environmental Economics and Management, Elsevier, vol. 127(C).
    5. Julien Ancel, 2025. "Tariffs time-dynamics in competitive electricity retail markets with differentiated consumer reactions," Post-Print hal-05100663, HAL.
    6. Rigaux, Baptiste & Hamels, Sam & Ovaere, Marten, 2025. "The proof of the pudding is in the heating: A field experiment on household engagement with heat pump flexibility," Energy Economics, Elsevier, vol. 148(C).
    7. Berha, Andu & Mohapatra, Sandeep, 2025. "Distributional effects of energy costs: Does firm ownership structure matter?," Energy Economics, Elsevier, vol. 141(C).
    8. Michael Crew & Paul Kleindorfer, 2012. "Regulatory economics and the journal of regulatory economics: a 30-year retrospective," Journal of Regulatory Economics, Springer, vol. 41(1), pages 1-18, February.
    9. Arlt, Marie-Louise & Chassin, David & Rivetta, Claudio & Sweeney, James, 2024. "Impact of real-time pricing and residential load automation on distribution systems," Energy Policy, Elsevier, vol. 184(C).
    10. Freier, Julia & von Loessl, Victor, 2022. "Dynamic electricity tariffs: Designing reasonable pricing schemes for private households," Energy Economics, Elsevier, vol. 112(C).
    11. Lu, Yucun & Gorrasi, Chiara & Meus, Jelle & Bruninx, Kenneth & Delarue, Erik, 2024. "System-wide benefits of temporal alignment of wholesale–retail electricity prices," Applied Energy, Elsevier, vol. 373(C).
    12. Somasundaram, Jeeva & Koch, Ingrid & Lim, Noah, 2023. "Raising the AC temperature in the tropics, one degree at a time," Energy Economics, Elsevier, vol. 128(C).
    13. Fu, Zheng & Novan, Kevin & Smith, Aaron, 2024. "Do time-of-use prices deliver energy savings at the right time?," Journal of Environmental Economics and Management, Elsevier, vol. 128(C).
    14. Ancel, Julien, 2025. "Tariffs time-dynamics in competitive electricity retail markets with differentiated consumer reactions," Energy Economics, Elsevier, vol. 148(C).
    15. Tin Cheuk Leung & Kwok Ping Ping & Kevin K. Tsui, 2019. "What can deregulators deregulate? The case of electricity," Journal of Regulatory Economics, Springer, vol. 56(1), pages 1-32, August.
    16. Cosmo, Valeria Di & O’Hora, Denis, 2017. "Nudging electricity consumption using TOU pricing and feedback: evidence from Irish households," Journal of Economic Psychology, Elsevier, vol. 61(C), pages 1-14.
    17. Durmaz, Tunç, 2016. "Precautionary Storage in Electricity Markets," Discussion Papers 2016/5, Norwegian School of Economics, Department of Business and Management Science.
    18. Carsten Helm & Mathias Mier, 2020. "Steering the Energy Transition in a World of Intermittent Electricity Supply: Optimal Subsidies and Taxes for Renewables Storage," ifo Working Paper Series 330, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    19. Weiss, Mariana & Chueca, J. Enrique & Jacob, Jorge & Gonçalves, Felipe & Azevedo, Marina & Gouvêa, Adriana & Ravillard, Pauline & Carvalho Metanias Hallack, Michelle, 2022. "Empowering Electricity Consumers through Demand Response Approach: Why and How," IDB Publications (Working Papers) 12133, Inter-American Development Bank.
    20. Keppler, Jan Horst & Quemin, Simon & Saguan, Marcelo, 2022. "Why the sustainable provision of low-carbon electricity needs hybrid markets," Energy Policy, Elsevier, vol. 171(C).

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_11355. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Klaus Wohlrabe (email available below). General contact details of provider: https://edirc.repec.org/data/cesifde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.