Price-elastic demand in deregulated electricity markets

The degree to which any deregulated market functions efficiently often depends on the ability of market agents to respond to fluctuating conditions. Many restructured electricity markets, however, have little demand response. We examine the implications for market operations when a risk-averse retailer's end-use consumers are allowed to perceive real-time variations in the electricity price. Using a market -equilibrium model, we find that price elasticity both increases the retailer's revenue risk exposure and decreases the spot price. Consequently, the overall impact of price- responsive demand on the electricity forward price is ambiguous.