Empirical Analysis of the Spot Market Implications ofPrice-Responsive Demand

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Regardless of the form of restructuring, deregulatedelectricity industries share one common feature: the absence of anysignificant, rapid demand-side response to the wholesale (or, spotmarket) price. For a variety of reasons, most electricity consumers stillpay an average cost based regulated retail tariff held over from the eraof vertical integration, even as the retailers themselves are oftenforced to purchase electricity at volatile wholesale prices set in openmarkets. This results in considerable price risk for retailers, who aresometimes additionally forbidden by regulators from signing hedgingcontracts. More importantly, because end-users do not perceive real-time(or even hourly or daily) fluctuations in the wholesale price ofelectricity, ... continued below

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Siddiqui, Afzal S.; Bartholomew, Emily S. & Marnay, Chris August 1, 2005.

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Description

Regardless of the form of restructuring, deregulatedelectricity industries share one common feature: the absence of anysignificant, rapid demand-side response to the wholesale (or, spotmarket) price. For a variety of reasons, most electricity consumers stillpay an average cost based regulated retail tariff held over from the eraof vertical integration, even as the retailers themselves are oftenforced to purchase electricity at volatile wholesale prices set in openmarkets. This results in considerable price risk for retailers, who aresometimes additionally forbidden by regulators from signing hedgingcontracts. More importantly, because end-users do not perceive real-time(or even hourly or daily) fluctuations in the wholesale price ofelectricity, they have no incentive to adjust their consumptionaccordingly. Consequently, demand for electricity is highly inelastic,which together with the non storability of electricity that requiresmarket clearing over very short time steps spawn many other problemsassociated with electricity markets, such as exercise of market power andprice volatility. Indeed, electricity generation resources can bestretched to the point where system adequacy is threatened. Economictheory suggests that even modest price responsiveness can relieve thestress on generation resources and decrease spot prices. To quantify thiseffect, actual generator bid data from the New York control area is usedto construct supply stacks and intersect them with demand curves ofvarious slopes to approximate the effect of different levels of demandresponse. The potential impact of real-time pricing (RTP) on theequilibrium spot price and quantity is then estimated. These resultsindicate the immediate benefits that could be derived from a moreprice-responsive demand providing policymakers with a measure of howprices can be potentially reduced and consumption maintained within thecapability of generation assets.

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  • Journal Name: Energy Studies Review; Journal Volume: 14; Journal Issue: 1; Related Information: Journal Publication Date: Fall 2005

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  • Report No.: LBNL--58747
  • Grant Number: DE-AC02-05CH11231
  • Office of Scientific & Technical Information Report Number: 929010
  • Archival Resource Key: ark:/67531/metadc899969

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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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  • August 1, 2005

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  • Sept. 27, 2016, 1:39 a.m.

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Siddiqui, Afzal S.; Bartholomew, Emily S. & Marnay, Chris. Empirical Analysis of the Spot Market Implications ofPrice-Responsive Demand, article, August 1, 2005; United States. (digital.library.unt.edu/ark:/67531/metadc899969/: accessed October 18, 2017), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.