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

Author

Listed:
  • Nidhi Kaicker

    (Ambedkar University Delhi (AUD))

  • Goutam Dutta

    (Indian Institute of Management)

  • Akashdeep Mishra

    (Ambedkar University Delhi (AUD)
    Indian Institute of Management
    Indira Gandhi Institute of Developmental Research)

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.

Suggested Citation

  • Nidhi Kaicker & Goutam Dutta & Akashdeep Mishra, 2022. "Time-of-use pricing in the electricity markets: mathematical modelling using non-linear market demand," OPSEARCH, Springer;Operational Research Society of India, vol. 59(3), pages 1178-1213, September.
    • Handle: RePEc:spr:opsear:v:59:y:2022:i:3:d:10.1007_s12597-021-00564-y
    DOI: 10.1007/s12597-021-00564-y
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    References listed on IDEAS

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    1. Nidhi Kaikar & Goutam Dutta & Debamanyu Das & Subhashree Banerjee, 2021. "Time-of-use pricing of electricity in monopoly and oligopoly," OPSEARCH, Springer;Operational Research Society of India, vol. 58(1), pages 1-28, March.
    2. Massimo, Filippini, 2011. "Short- and long-run time-of-use price elasticities in Swiss residential electricity demand," Energy Policy, Elsevier, vol. 39(10), pages 5811-5817, October.
    3. Herter, Karen & McAuliffe, Patrick & Rosenfeld, Arthur, 2007. "An exploratory analysis of California residential customer response to critical peak pricing of electricity," Energy, Elsevier, vol. 32(1), pages 25-34.
    4. Peter C. Reiss & Matthew W. White, 2005. "Household Electricity Demand, Revisited," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(3), pages 853-883.
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