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The Efficiency of Dynamic Electricity Prices

Author

Listed:
  • Andrew J. Hinchberger
  • Mark R. Jacobsen
  • Christopher R. Knittel
  • James M. Sallee
  • Arthur A. van Benthem

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 while limiting customer risk.

Suggested Citation

  • Andrew J. Hinchberger & Mark R. Jacobsen & Christopher R. Knittel & James M. Sallee & Arthur A. van Benthem, 2024. "The Efficiency of Dynamic Electricity Prices," NBER Working Papers 32995, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32995
    Note: EEE IO PE PR
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    More about this item

    JEL classification:

    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L97 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Utilities: General
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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