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  5. Empirical analysis of the spot market implications of price-elastic demand
 
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Empirical analysis of the spot market implications of price-elastic demand

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Author(s)
Siddiqui, Afzal S. 
Bartholomew, Emily S. 
Marnay, Chris 
Uri
http://hdl.handle.net/10197/1157
Date Issued
2004
Date Available
09T14:25:14Z June 2009
Abstract
Regardless of the form of restructuring, deregulated electricity industries share one common feature: the absence of any significant, rapid demand-side response to the wholesale (or, spot market) price. For a variety of reasons, electricity industries continue to charge most consumers an average cost based on regulated retail tariff from the era of vertical integration, even as the retailers themselves are forced to purchase electricity at volatile wholesale prices set in open markets. This results in considerable price risk for retailers, who are sometimes forbidden by regulators from signing hedging contracts. More importantly, because end-users do not perceive real-time (or even hourly or daily) fluctuations in the wholesale price of electricity, they have no incentive to adjust their consumption in response to price signals. Consequently, demand for electricity is highly inelastic, and electricity generation resources can be stretched to the point where system stability is threatened. This, then, facilitates many other problems associated with electricity markets, such as market power and price volatility. Indeed, economic theory suggests that even modestly price-responsive demand can remove the stress on generation resources and decrease spot prices. To test this theory, we use actual generator bid data from the New York control area to construct supply stacks, and intersect them with demand curves of various slopes to approximate different levels of demand elasticity. We then estimate the potential impact of real-time pricing on the equilibrium spot price and quantity. These results indicate the immediate benefits that could be derived from a more price-elastic demand. Such analysis can provide policymakers with a measure of how effective price-elastic demand can potentially reduce prices and maintain consumption within the capability of generation resources.
Sponsorship
University College Dublin. Business Research Programme
Type of Material
Working Paper
Publisher
University College Dublin. School of Business. Centre for Financial Markets
Series
Centre for Financial Markets working paper series
WP-04-03
Copyright (Published Version)
2004, Centre for Financial Markets
Subject – LCSH
Elasticity (Economics)
Electric utilities--Deregulation
Electricity--Prices
Web versions
http://www.ucd.ie/bankingfinance/docs/wp/SIDDIQUI1.pdf
Language
English
Status of Item
Not peer reviewed
This item is made available under a Creative Commons License
https://creativecommons.org/licenses/by-nc-sa/1.0/
Owning collection
Centre for Financial Markets Working Papers
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Feb 3, 2023
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