Dynamic Pricing, Advanced Metering, and Demand Response in Electricity Markets

TLDR

The economics of demand‑side participation reveal that systems lacking such incentives suffer losses and that introducing incentives can improve market efficiency and competitiveness. This monograph aims to analyze and promote the integration of active demand‑side participation through dynamic retail pricing in electricity markets. The authors review incentive mechanisms, including time‑varying tariffs such as Realtime and Critical Peak Pricing, and outline the development of dynamic retail prices and customer response strategies. Pilot and long‑term programs show that customers respond to dynamic pricing as predicted by optimization models, supporting the case for broader adoption of frequent, short‑notice price adjustments.

Abstract

In this monograph, we present an overview and analysis of the possible approaches to bringing an active demand side into electricity markets. In section I, we describe the ways in which economic incentives can be introduced on the demand side. We discuss the fundamental economics of establishing these incentives and the economic loss from systems that lack demand-side participation, and we analyze the effect of these incentives on the efficiency and competitiveness of the market. In section II, we move from the fundamentals to specific issues of implementing time-varying prices. We begin by describing illustrative Realtime Pricing and Critical Peak Pricing tariffs that are in use today. We then address the actual development of dynamic retail prices. In section III, we examine the ways in which customers respond to time-varying and dynamic prices. We discuss both the potential responses that are envisioned by those who study optimization of power use and the actual responses that have taken place in pilot and long-term programs. We conclude in section IV by advocating much wider use of dynamic retail pricing, under which prices faced by end-use customers can be adjusted frequently and on short notice to reflect changes in wholesale prices and the supply/demand balance.