On the Efficiency of Competitive Electricity Markets With Time-Invariant Retail Prices
Severin Borenstein () and
Stephen Holland ()
No 9922, NBER Working Papers from National Bureau of Economic Research, Inc
The standard economic model of efficient competitive markets relies on the ability of sellers to charge prices that vary as their costs change. Yet, there is no restructured electricity market in which most retail customers can be charged realtime prices (RTP), prices that can change as frequently as wholesale costs. We analyze the impact of having some share of customers on time-invariant pricing in competitive electricity markets. Not only does time-invariant pricing in competitive markets lead to outcomes (prices and investment) that are not first-best, it even fails to achieve the second-best optimum given the constraint of time-invariant pricing. We then show that attempts to correct the level of investment through taxes or subsidies on electricity or capacity are unlikely to succeed, because these interventions create new inefficiencies. In contrast, increasing the share of customers on RTP is likely to improve efficiency, though surprisingly, it does not necessarily reduce capacity investment, and it is likely to harm customers that are already on RTP.
JEL-codes: L8 L9 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com and nep-rmg
Note: IO EEE
References: View complete reference list from CitEc
Citations: View citations in EconPapers (32) Track citations by RSS feed
Published as Borenstein, Severin and Stephen Holland. "On The Efficiency Of Competitive Electricity Markets With Time-Invariant Retail Prices," Rand Journal of Economics, 2005, v36(3,Autumn), 469-493.
Downloads: (external link)
Journal Article: On the Efficiency of Competitive Electricity Markets with Time-Invariant Retail Prices (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:9922
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().