Empirical analysis of the spot market implications ofprice-elastic demand

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Regardless of the form of restructuring, deregulated electricity industries share one common feature: the absence of any significant, rapid demand-side response to the wholesale (or, spotmarket) price. For a variety of reasons, electricity industries continue to charge most consumers an average cost based on regulated retail tariff from the era of vertical integration, even as the retailers themselves are forced to purchase electricity at volatile wholesale prices set in open markets. This results in considerable price risk for retailers, who are sometimes forbidden by regulators from signing hedging contracts. More importantly, because end-users do not perceive real-time (or even hourly ... continued below

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Siddiqui, Afzal S.; Bartholomew, Emily S. & Marnay, Chris July 8, 2004.

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Regardless of the form of restructuring, deregulated electricity industries share one common feature: the absence of any significant, rapid demand-side response to the wholesale (or, spotmarket) price. For a variety of reasons, electricity industries continue to charge most consumers an average cost based on regulated retail tariff from the era of vertical integration, even as the retailers themselves are forced to purchase electricity at volatile wholesale prices set in open markets. This results in considerable price risk for retailers, who are sometimes forbidden by regulators from signing hedging contracts. More importantly, because end-users do not perceive real-time (or even hourly or daily) fluctuations in the wholesale price of electricity, they have no incentive to adjust their consumption in response to price signals. Consequently, demand for electricity is highly inelastic, and electricity generation resources can be stretched to the point where system stability is threatened. This, then, facilitates many other problems associated with electricity markets, such as market power and price volatility. Indeed, economic theory suggests that even modestly price-responsive demand can remove the stress on generation resources and decrease spot prices. To test this theory, we use actual generator bid data from the New York control area to construct supply stacks, and intersect them with demand curves of various slopes to approximate different levels of demand elasticity. We then estimate the potential impact of real-time pricing on the equilibrium spot price and quantity. These results indicate the immediate benefits that could be derived from a more price-elastic demand. Such analysis can provide policymakers with a measure of how effective price-elastic demand can potentially reduce prices and maintain consumption within the capability of generation resources.

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  • 24th Annual North American Conference ofUSAEE/IAEE, Energy, Environment, and Economics in a New Era, Washington,DC, July 8-10, 2004

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  • Report No.: LBNL--56141
  • Grant Number: DE-AC02-05CH11231
  • Office of Scientific & Technical Information Report Number: 860904
  • Archival Resource Key: ark:/67531/metadc786113

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Office of Scientific & Technical Information Technical Reports

Reports, articles and other documents harvested from the Office of Scientific and Technical Information.

Office of Scientific and Technical Information (OSTI) is the Department of Energy (DOE) office that collects, preserves, and disseminates DOE-sponsored research and development (R&D) results that are the outcomes of R&D projects or other funded activities at DOE labs and facilities nationwide and grantees at universities and other institutions.

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  • July 8, 2004

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  • Dec. 3, 2015, 9:30 a.m.

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  • Dec. 1, 2017, 3:41 p.m.

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Siddiqui, Afzal S.; Bartholomew, Emily S. & Marnay, Chris. Empirical analysis of the spot market implications ofprice-elastic demand, article, July 8, 2004; Berkeley, California. (digital.library.unt.edu/ark:/67531/metadc786113/: accessed January 18, 2018), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.