Measuring Demand Responses to Wholesale Electricity Prices Using Market Power Indices

47 Pages Posted: 31 Mar 2016

See all articles by Talat Genc

Talat Genc

University of Guelph - Department of Economics

Date Written: March 30, 2016

Abstract

We investigate wholesale demand response to hourly price movements in the Ontario wholesale electricity market using detailed generator and market level data. We calculate hourly market power measures such as the Lerner Index and the Residual Supplier Index, which are utilized in a Cournot competition model to structurally estimate price elasticity of demand during peak hours of days, seasons and years. We find that price elasticities are small and statistically significant, and they exhibit large variations over the times of days/seasons and show differences over the years. For instance, while the elasticity estimates fall into the range [-0.021, -0.133] in 2007, they are in the interval of [-0.013, -0.053] in 2008. We also extend the study period to include 2006 (during which extreme weather conditions occurred) and 2009 (when the economic crisis hit and natural gas prices plummeted) to measure the demand responses to irregular price movements and find that price elasticities during the economic crisis were higher than a year earlier. Comparing high demand winter hours to high demand summer hours indicates that consumers’ price responsiveness is lower in summer than in winter during 2006-2009. Moreover, we employ these indices along with the estimated price elasticities to project the likely impact of interconnection capacity expansions on market prices. Our calibrations show that even a small amount of transmission investment (and hence trade activity) can result in substantial market price reductions. In addition, we discuss how our approach could be used to estimate price elasticities for other goods such as crude oil and gasoline.

Keywords: Price elasticity of demand; wholesale electricity market; Cournot competition; GMM estimation

JEL Classification: D22; D24; L13; L94; Q41

Suggested Citation

Genc, Talat, Measuring Demand Responses to Wholesale Electricity Prices Using Market Power Indices (March 30, 2016). Available at SSRN: https://ssrn.com/abstract=2756618 or http://dx.doi.org/10.2139/ssrn.2756618

Talat Genc (Contact Author)

University of Guelph - Department of Economics ( email )

50 Stone Road East
Guelph, Ontario N1G 2W1
Canada

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
29
Abstract Views
333
PlumX Metrics