The Efficiency of Dynamic Electricity Prices

Andrew Hinchberger, Mark Jacobsen, Christopher Knittel, James Sallee and Arthur van Benthem

No 19475, CEPR Discussion Papers from Centre for Economic Policy Research

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.

JEL-codes: L94 L97 Q41 Q48 (search for similar items in EconPapers)
Date: 2024-09
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