www.ucei.org The Distributional and Environmental Effects of Time-Varying Prices in Competitive Electricity Markets

This paper analyzes the short-run effects of time-varying retail electricity prices on wholesale prices, consumer surplus, generator profits, efficiency, and emissions. We apply a model of real-time pricing (RTP) adoption in competitive markets to the Pennsylvania, New Jersey and Maryland (PJM) electricity market. Consistent with theory, our simulations show that RTP adoption improves efficiency, reduces the variance and average of wholesale prices, and reduces all retail rates. In addition, we find that RTP adoption would increase the average load since increases in off-peak loads are large relative to the reductions in peak loads. Operating profits for all fossil-fired generation decrease with the largest decreases for oil-fired generation (59 % when all customers adopt) and for gas-fired generation (34%). When all customers adopt RTP, the consumer surplus gain is approximately 2.5 % of the energy bill, but the welfare gain is only 0.24 % of the energy bill. The modest short-run gains, their dispersion across many customers, and free riding may explain the ambivalence of many customers toward RTP adoption. The changes in emissions from RTP adoption follow the shifts in supply. Since coal-fire