Empirical analysis of the spot market implications ofprice-elastic demand

Conference · Thu Jul 08 04:00:00 EDT 2004

OSTI ID:860904

Siddiqui, Afzal S; Bartholomew, Emily S; Marnay, Chris

Regardless of the form of restructuring, deregulated electricity industries share one common feature: the absence of any significant, rapid demand-side response to the wholesale (or, spotmarket) price. For a variety of reasons, electricity industries continue to charge most consumers an average cost based on regulated retail tariff from the era of vertical integration, even as the retailers themselves are forced to purchase electricity at volatile wholesale prices set in open markets. This results in considerable price risk for retailers, who are sometimes forbidden by regulators from signing hedging contracts. More importantly, because end-users do not perceive real-time (or even hourly or daily) fluctuations in the wholesale price of electricity, they have no incentive to adjust their consumption in response to price signals. Consequently, demand for electricity is highly inelastic, and electricity generation resources can be stretched to the point where system stability is threatened. This, then, facilitates many other problems associated with electricity markets, such as market power and price volatility. Indeed, economic theory suggests that even modestly price-responsive demand can remove the stress on generation resources and decrease spot prices. To test this theory, we use actual generator bid data from the New York control area to construct supply stacks, and intersect them with demand curves of various slopes to approximate different levels of demand elasticity. We then estimate the potential impact of real-time pricing on the equilibrium spot price and quantity. These results indicate the immediate benefits that could be derived from a more price-elastic demand. Such analysis can provide policymakers with a measure of how effective price-elastic demand can potentially reduce prices and maintain consumption within the capability of generation resources.

• Research Organization: Ernest Orlando Lawrence Berkeley NationalLaboratory, Berkeley, CA (US)
• Sponsoring Organization: USDOE. Assistant Secretary for Energy Efficiency andRenewable Energy; University College Dublin
• DOE Contract Number: AC02-05CH11231
• OSTI ID: 860904
• Report Number(s): LBNL--56141; BnR: EH2500000
• Country of Publication: United States
• Language: English

Related Subjects

29 ENERGY PLANNING, POLICY, AND ECONOMY
32 ENERGY CONSERVATION, CONSUMPTION, AND UTILIZATION
AVAILABILITY
ECONOMICS
ELASTICITY
ELECTRICITY
FLUCTUATIONS
MARKET
PRICES
RETAILERS
SPOT MARKET
STABILITY
TARIFFS
VERTICAL INTEGRATION
VOLATILITY
WHOLESALE PRICES