The Effect of Customer Participation in Electricity Markets: An Experimental Analysis of Alternative Market Structures

An experimental structure is demonstrated that represents end-use customers in electricity markets who can substitute part of their usage between day and night. Individuals ’ demand relationships are represented by a two-step value function for each period that are disaggregated from observed market demand relationships. Demand varies between day and night and during heat waves. Three alternative demand-side market structures are evaluated: 1) customers pay the same fixed price (FP) in all periods – the base case, 2) a demand response feature (DRP) is added in periods of supply shortages, wherein buyers receive a pre-specified credit for reduced purchases, and 3) a real time pricing (RTP) case where prices are forecast for the upcoming day/night pair, then buyers select their quantity purchases sequentially and are charged the actual market-clearing prices. Initial experiments were conducted with active demand-participants, but with a predetermined typical “hockey-stick ” supply structure that was varied randomly, over eleven day-night pairs that included heat wave and supply shortages. The RTP structure resulted in the greatest market efficiency, despite the more difficult cognitive problem it poses for buyers. Furthermore, a preference poll comparing DRP and RTP was conducted after each trial; and while 64 % of the participants said they preferred DRP before RTP experiments, 76 % selected the RTP structure afterwards, a statistically significant reversal of preferences. 1