On the Efficiency of Competitive Electricity Markets with Time-Invariant Retail Prices

36 Pages Posted: 29 Aug 2003 Last revised: 4 Nov 2010

See all articles by Severin Borenstein

Severin Borenstein

University of California, Berkeley - Economic Analysis & Policy Group; National Bureau of Economic Research (NBER)

Stephen P. Holland

University of California, Berkeley - Energy Institute; University of North Carolina (UNC) at Greensboro - Bryan School of Business & Economics

Date Written: August 2003

Abstract

The standard economic model of efficient competitive markets relies on the ability of sellers to charge prices that vary as their costs change. Yet, there is no restructured electricity market in which most retail customers can be charged realtime prices (RTP), prices that can change as frequently as wholesale costs. We analyze the impact of having some share of customers on time-invariant pricing in competitive electricity markets. Not only does time-invariant pricing in competitive markets lead to outcomes (prices and investment) that are not first-best, it even fails to achieve the second-best optimum given the constraint of time-invariant pricing. We then show that attempts to correct the level of investment through taxes or subsidies on electricity or capacity are unlikely to succeed, because these interventions create new inefficiencies. In contrast, increasing the share of customers on RTP is likely to improve efficiency, though surprisingly, it does not necessarily reduce capacity investment, and it is likely to harm customers that are already on RTP.

Suggested Citation

Borenstein, Severin and Holland, Stephen P., On the Efficiency of Competitive Electricity Markets with Time-Invariant Retail Prices (August 2003). NBER Working Paper No. w9922. Available at SSRN: https://ssrn.com/abstract=437491

Severin Borenstein (Contact Author)

University of California, Berkeley - Economic Analysis & Policy Group ( email )

Berkeley, CA 94720
United States
510-642-3689 (Phone)
707-885-2508 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Stephen P. Holland

University of California, Berkeley - Energy Institute ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

University of North Carolina (UNC) at Greensboro - Bryan School of Business & Economics ( email )

401 Bryan Building
Greensboro, NC 27402-6179
United States

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