Factoring the elasticity of demand in electricity prices

TLDR

Liberalized electricity markets expose consumers to volatile prices, prompting demand‑profile adjustments to lower costs. The study examines how market structure influences electricity demand elasticity and demonstrates its use in generation scheduling and price setting in pool markets. Consumer behavior is modeled with a self‑ and cross‑elasticity matrix, illustrated on a 26‑generator system. Elasticities can be incorporated into generation scheduling and price setting in pool‑based markets.

Abstract

As electricity markets are liberalized, consumers become exposed to more volatile electricity prices and may decide to modify the profile of their demand to reduce their electricity costs. This paper analyzes the effect that the market structure can have on the elasticity of the demand for electricity. It then describes how the consumers' behavior can be modeled using a matrix of self- and cross-elasticities. It is shown how these elasticities can be taken into consideration when scheduling generation and setting the price of electricity in a pool based electricity market. These concepts are illustrated using a 26-generator system.