Real-time pricing of electricity on large industrial energy consumers

This study critiques and extends the theory of spot market electricity pricing, and analyzes market behavior in an actual, albeit imperfect, implementation of spot market pricing principles. An electric rate offered to large industrial energy consumers by an electric utility in Texas was analyzed.;Spot market pricing (or short-run marginal cost pricing) promises lower operating costs and prices, and system expansion decisions that properly reflect the value that consumers place upon reliable electric service. However, practical considerations have hampered implementation until recently.;While customer responsiveness is the key determinant of the success of a spot market pricing program, it is also the variable for which the least is presently known. This study presents possibly the first set of elasticity estimates for large industrial customers facing hourly rates based upon the utility's short-run marginal cost. An econometric translog cost function methodology was adopted for this purpose. The estimated own-price elasticity response averaged ;Optimization techniques were used to simulate price and consumption determination in a partial spot market implementation and address a variety of economic and policy issues. It was estimated that the operating cost savings attributable to hourly pricing program examined in this study were on the order of ;Should revenue reconciliation be deemed necessary, a basic conflict between Ramsey pricing strategies and spot market pricing and long-run objectives may emerge, since the industrial energy consumers studied tended to be the least responsive to price changes during periods of low system demand and utility marginal costs.;With technological advances, increasingly competitive energy markets, interest in partial deregulation, and higher energy prices, spot market or real-time pricing of electricity on industrial customers will likely become more widespread in the future. An enhanced understanding of market behavior under this pricing system is vital to effective implementation.