Customer Risk from Real-Time Retail Electricity Pricing: Bill Volatility and Hedgability

Severin Borenstein

No 12524, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: One of the most critical concerns that customers have voiced in the debate over real-time retail electricity pricing is that they would be exposed to risk from fluctuations in their electricity cost. The concern seems to be that a customer could find itself consuming a large quantity of power on the day that prices skyrocket and thus receive a monthly bill far larger than it had budgeted for. I analyze the magnitude of this risk, using demand data from 1142 large industrial customers, and then ask how much of this risk can be eliminated through various straightforward financial instruments. I find that very simple hedging strategies can eliminate more than 80% of the bill volatility that would otherwise occur. Far from being complex, mystifying financial instruments that only a Wall Street analyst could love, these are simple forward power purchase contracts, and are already offered to retail customers by a number of fully-regulated utilities that operate real-time pricing programs. I then show that a slightly more sophisticated application of these forward power purchases can significantly enhance their effect on reducing bill volatility.

JEL-codes: L51 L94 (search for similar items in EconPapers)
Date: 2006-09
New Economics Papers: this item is included in nep-ene and nep-fmk
Note: IO AP EEE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published as Severin Borenstein, 2007. "Customer Risk from Real-Time Retail Electricity Pricing: Bill Volatility and Hedgability," The Energy Journal, International Association for Energy Economics, vol. 28(2), pages 111-130.

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Journal Article: Customer Risk from Real-Time Retail Electricity Pricing: Bill Volatility and Hedgability (2007)
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