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Role of Advance Notice on High-priced Hours: Critical peak pricing on industrial demand

Daiya Isogawa, Hiroshi Ohashi () and Tokunari Anai

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: This paper evaluates the impact of advance notice of demand curtailment events on inter-temporal consumption patterns of industrial electricity consumers. The empirical analysis focuses on a demand-response program offered in Japan, which has the same incentive structure as critical peak pricing (CPP). CPP imposes known higher prices at times that are not announced ahead of time, but the uncertainty of high-priced hours presumably limits the extent to which demand flexibly responds to the price intervention. Estimates of inter-temporal constant-elasticity-substitution preference indicate that advance notice weakens, not strengthens, the effectiveness of CPP for those industrial users who have lower rates of intra-day substitution of electricity consumption. The electricity demand turns significantly less elastic when the timings of CPP are announced in advance, compared to when they are kept unknown. This is largely because industrial electricity users in the Japanese manufacturing sector prioritize stable utilization of production facilities. Finally, the estimates imply that providing advance notice would encourage the participation of the demand curtailment program.

Pages: 25 pages
Date: 2022-07
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