NCPA - National Center for Policy Analysis

Electricity Markets

November 7, 2002

During the summers of 1998 and 1999, prices in the Midwest soared to $7,000 or more per megawatt-hour compared to a typical price of $30 to $50. One factor contributing to this volatility is the fact that relatively few retail customers pay real-time prices (RTP) that vary with changes in supply and demand. Recent research suggests that using RTP can generate vast savings.

Analyzing data from Duke Power's RTP rate program, researchers found the savings are substantial:

  • As theory would suggest, RTP customers reduce would their demand for electric power during peak hours.
  • By reducing demand during key hours, Duke Power's load is about 70 megawatts less per day.
  • Absolute quantity changes are largest at peak hours, but these changes are dwarfed by percentage changes in price that may be as large as 500 percent on a very hot day.

This leads to substantial cost savings to customers:

  • Individually, customers using the RTP program avoided costs of $3.90 per megawatt per year for additional generating capacity.
  • This translates into a long-term savings totaling $2.7 million per year.
  • Even with price caps as low as the $150 recently imposed in California, short-term saving associated with the response to RTP can be substantial.

The longer a customer uses the program, the more adept they are at using the system. Long-time customers were 5 percent more responsive to price changes than newer customers.

RTP programs may offer simple ways of coping with escalating electricity costs.

Source: John A. List and David Lucking-Reiley, "Bidding Behavior and Decision Costs in Field Experiments," Economic Inquiry, Vol. 40, No. 4, October 2002.

 

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