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How aggregate electricity demand responds to hourly wholesale price fluctuations

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  • Hirth, Lion
  • Khanna, Tarun
  • Ruhnau, Oliver

Abstract

Electricity needs to be consumed at the very moment of production, leading wholesale prices to fluctuate widely at (sub-)hourly time scales. This article investigates the response of aggregate electricity demand to such price variations. Using wind energy as an instrument, we estimate a significant and robust short-term price elasticity of about -0.05 in Germany and attribute this to industrial consumers. While seemingly modest, our results imply that even with limited exposure to real time prices, short-term demand response facilitates decarbonization of the electricity grid by reducing the need for battery storage or backup fossil power by approximately 8%.

Suggested Citation

  • Hirth, Lion & Khanna, Tarun & Ruhnau, Oliver, 2023. "How aggregate electricity demand responds to hourly wholesale price fluctuations," EconStor Preprints 272048, ZBW - Leibniz Information Centre for Economics.
    • Handle: RePEc:zbw:esprep:272048
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    References listed on IDEAS

    as
    1. Huisman, Ronald & Huurman, Christian & Mahieu, Ronald, 2007. "Hourly electricity prices in day-ahead markets," Energy Economics, Elsevier, vol. 29(2), pages 240-248, March.
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    4. Wai Choi & Anindya Sen & Adam White, 2011. "Response of industrial customers to hourly pricing in Ontario’s deregulated electricity market," Journal of Regulatory Economics, Springer, vol. 40(3), pages 303-323, December.
    5. Lijesen, Mark G., 2007. "The real-time price elasticity of electricity," Energy Economics, Elsevier, vol. 29(2), pages 249-258, March.
    6. Matthew Harding & Steven Sexton, 2017. "Household Response to Time-Varying Electricity Prices," Annual Review of Economics, Annual Reviews, vol. 9(1), pages 337-359, October.
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    More about this item

    Keywords

    Short-term price elasticity; Electricity markets; Demand response; Instrumental variables; Wind energy;
    All these keywords.

    JEL classification:

    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

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