The Distributional and Environmental Effects of Time-Varying Prices in Competitive Electricity Markets
Stephen P. Holland
University of California, Berkeley - Energy Institute; University of North Carolina (UNC) at Greensboro - Bryan School of Business & Economics
Erin T. Mansur
Tuck School of Business at Dartmouth; National Bureau of Economic Research (NBER)
May 17, 2005
Yale SOM Working Paper No. ES-42
UC Energy Institute CSEM Working Paper No. 143
This paper analyzes the short-run effects of time-varying retail electricity prices on wholesale prices, consumer surplus, generator profits, efficiency, and emissions. We apply a model of realtime pricing (RTP) adoption in competitive markets to the Pennsylvania, New Jersey and Maryland (PJM) electricity market.
Consistent with theory, our simulations show that RTP adoption improves efficiency, reduces the variance and average of wholesale prices, and reduces all retail rates. In addition, we find that RTP adoption would increase the average load since increases in off-peak loads are large relative to the reductions in peak loads. Operating profits for all fossil-fired generation decrease with the largest decreases for oil-fired generation (59% when all customers adopt) and for gas-fired generation (34%). When all customers adopt RTP, the consumer surplus gain is approximately 2.5% of the energy bill, but the welfare gain is only 0.24% of the energy bill. The modest short-run gains, their dispersion across many customers, and free riding may explain the ambivalence of many customers toward RTP adoption.
The changes in emissions from RTP adoption follow the shifts in supply. Since coal-fired generation increases and has relatively high emissions of SO2 and NOx, emissions of these pollutants increase. However, CO2 emissions decrease with RTP adoption.
We find that much of the efficiency gains of real-time price variation could be attained by varying the flat rates monthly instead of annually. Monthly flat rate adjustment would have many of the same effects as RTP adoption and would reduce the deadweight loss by approximately 30% using installed metering technology. Furthermore, flat rates that vary monthly are superior to rates that vary by time of use.
The results are robust to different assumptions about demand shifters, demand elasticities, import supply elasticities, and generator outage factors.
Number of Pages in PDF File: 33
Keywords: Real-time pricing, externalities, electricity markets, regulation
JEL Classification: L51, L94, Q53
Date posted: June 7, 2005