The Long-Run Efficiency of Real-Time Electricity Pricing

Severin Borenstein

The Energy Journal, 2005, vol. 26, issue 3, 93-116

Abstract: Retail real-time pricing (RTP) of electricity - retail pricing that changes hourly to reflect the changing supply/demand balance - is very appealing to economists because it “sends the right price signals" Economic efficiency gains from RTP, however, are often confused with the short-term wealth transfers from producers to consumers that RTP can create. Abstracting from transfers, I focus on the long-run efficiency gains from adopting RTP in a competitive electricity market. Using simple simulations with realistic parameters, I demonstrate that the magnitude of efficiency gains from RTP is likely to be significant even if demand shows very little elasticity. I also show that “time-of-use" pricing, a simple peak and off-peak pricing system, is likely to capture a very small share of the efficiency gains that RTP offers.

Keywords: Electricity; real-time pricing (RTP); time-of-use pricing (TOU); welfare (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:sae:enejou:v:26:y:2005:i:3:p:93-116

DOI: 10.5547/ISSN0195-6574-EJ-Vol26-No3-5

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