The Efficiency of Dynamic Electricity Prices

Andrew J. Hinchberger, Mark R. Jacobsen, Christopher R. Knittel, James M. Sallee and Arthur A. van Benthem

No 11355, CESifo Working Paper Series from CESifo

Abstract: The marginal cost of electricity fluctuates hour-by-hour, yet retail customers typically face flat prices. Using data from all seven US wholesale markets and a new method to evaluate alternative rates set in advance that accounts for equilibrium price effects, we estimate efficiency gains from time-varying price schedules that better align price with cost. We have three main results. First, time-of-use rates and critical-peak pricing, the two most common time-varying rate plans, each correct about 10% of mispricing. Second, complex rate structures based on historical prices often backfire. Third, real-time pricing with price ceilings can capture most potential efficiency gains.

Keywords: electricity; time-of-use pricing; critical- peak pricing; real-time pricing; efficiency (search for similar items in EconPapers)
JEL-codes: L94 L97 Q41 Q48 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-ene and nep-reg
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