Working Paper: NBER ID: w24712
Authors: Imelda Matthias Fripp; Michael J Roberts
Abstract: On a levelized-cost basis, solar and wind power generation are now competitive with fossil fuels. But supply of these renewable resources is variable and intermittent, unlike traditional power plants. As a result, the cost of using flat retail pricing instead of dynamic, marginal-cost pricing—long advocated by economists—will grow. We evaluate the potential gains from dynamic pricing in high-renewable systems using a novel model of power supply and demand in Hawai’i. The model breaks new ground in integrating investment in generation and storage capacity with chronological operation of the system, including an account of reserves, a demand system with different interhour elasticities for different uses, and substitution between power and other goods and services. The model is open source and fully adaptable to other settings. Consistent with earlier studies, we find that dynamic pricing provides little social benefit in fossil-fuel-dominated power systems, only 2.6 to 4.6 percent of baseline annual expenditure. But dynamic pricing leads to a much greater social benefit of 8.5 to 23.4 percent in a 100 percent renewable power system with otherwise similar assumptions. High renewable systems, including 100 percent renewable, are remarkably affordable. The welfare maximizing (unconstrained) generation portfolio under the utility’s projected 2045 technology and pessimistic interhour demand flexibility uses 79 percent renewable energy, without even accounting for pollution externalities. If overall demand for electricity is more elastic than our baseline (0.1), renewable energy is even cheaper and variable pricing can improve welfare by as much as 47 percent of baseline expenditure.
Keywords: dynamic pricing; renewable energy; Hawaii; social welfare; electricity demand
JEL Codes: Q41; Q42; Q53
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| dynamic pricing (D49) | social benefit in fossil-fuel-dominated systems (P18) |
| dynamic pricing (D49) | social benefit in 100% renewable power system (Q42) |
| demand elasticity (D12) | effectiveness of dynamic pricing (D49) |