The Long-Run Efficiency of Real-Time Electricity Pricing

Abstract

Retail real-time pricing (RTP) of electricity - retail pricing that changes hourly to reflect the changing supply/demand balance - is very appealing to economists because it “sends the right price signals" Economic efficiency gains from RTP, however, are often confused with the short-term wealth transfers from producers to consumers that RTP can create. Abstracting from transfers, I focus on the long-run efficiency gains from adopting RTP in a competitive electricity market. Using simple simulations with realistic parameters, I demonstrate that the magnitude of efficiency gains from RTP is likely to be significant even if demand shows very little elasticity. I also show that “time-of-use" pricing, a simple peak and off-peak pricing system, is likely to capture a very small share of the efficiency gains that RTP offers.