Abstract
Many utilities are offering real-time pricing (RTP) to their large industrial customers. Under RTP, hourly rates change with real-time supply and demand. As compared to fixed rates, RTP shifts price risk from the utility to the customer. With such a change, it is natural to ask if there is an optimal level of advance notice of prices. This paper contains a simulation of real-time rates for industrial customers with and without advance notice of prices. Advance notice is valuable to customers who can increase elasticity of substitution. This value must be weighed against the cost to the electric utility from an increase in demand forecast error. The simulation suggests that day-ahead advance notice increases welfare for reasonable magnitudes of customer elasticity and utility forecast error.
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This material was prepared with the support of the U.S. Department of Energy, Grant No. DE-FG48-95R810582 A000. However, any opinions, findings, conclusions, or recommendations expressed herein are those of the authors and do not necessarily reflect the views of the U.S. Department of Energy. This work was also supported in part by funds provided by the University of North Carolina, a Barclays American Research Award, and the Belk College of Business Administration. The authors are grateful for comments provided by Steve Braithwait, Laurence Kirsch, Steve Johnston, Peter Griffes, John Trapani, Mike O'Sheasy, and participants of Research Triangle Institute, Western Economic Association, and Rutgers University Center for Research in Regulated Industries Advanced Workshop in Regulation and Public Utility Economics.
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Taylor, T.N., Schwarz, P.M. Advance notice of real-time electricity prices. Atlantic Economic Journal 28, 478–488 (2000). https://doi.org/10.1007/BF02298399
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DOI: https://doi.org/10.1007/BF02298399