Time-of-use pricing in the electricity markets: mathematical modelling using non-linear market demand

Nidhi Kaicker (), Goutam Dutta () and Akashdeep Mishra ()
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Nidhi Kaicker: Ambedkar University Delhi (AUD)
Goutam Dutta: Indian Institute of Management
Akashdeep Mishra: Ambedkar University Delhi (AUD)

OPSEARCH, 2022, vol. 59, issue 3, No 17, 1178-1213

Abstract: Abstract We determine the gains in efficiency accruing to a monopolist producer facing a non-linear market demand under a time-of-use (TOU) pricing structure as opposed to a flat rate pricing (FRP) structure. In particular, we consider the constant elasticity of demand function and the exponential demand function for this analysis. We estimate the price and quantity demanded for these two types of functions and optimize the profit earned by the producer. A comparison of the linear, exponential, and constant elasticity of demand functions shows that in cases of linear and exponential demand, the TOU pricing works to reduce the peak demand below the installed capacity and saves on additional investment and operation costs, while no such reduction takes place in the case of constant elasticity of demand. However, profit accruing to the monopolist under the TOU pricing structure exceeds that under FRP, irrespective of the form of the demand function. Thus, we conclude that regardless of the shape of the demand function, a time-varying pricing structure is better than the traditional FRP. Finally, we study some implications for the policy maker if such a pricing structure is implemented.

Keywords: Non-linear pricing; Dynamic pricing; Oligopoly; Electricity market (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s12597-021-00564-y

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