Working Paper: NBER ID: w9922
Authors: Severin Borenstein; Stephen P. Holland
Abstract: The standard economic model of efficient competitive markets relies on the ability of sellers to charge prices that vary as their costs change. Yet, there is no restructured electricity market in which most retail customers can be charged realtime prices (RTP), prices that can change as frequently as wholesale costs. We analyze the impact of having some share of customers on time-invariant pricing in competitive electricity markets. Not only does time-invariant pricing in competitive markets lead to outcomes (prices and investment) that are not first-best, it even fails to achieve the second-best optimum given the constraint of time-invariant pricing. We then show that attempts to correct the level of investment through taxes or subsidies on electricity or capacity are unlikely to succeed, because these interventions create new inefficiencies. In contrast, increasing the share of customers on RTP is likely to improve efficiency, though surprisingly, it does not necessarily reduce capacity investment, and it is likely to harm customers that are already on RTP.
Keywords: No keywords provided
JEL Codes: L9; L8; L5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| time-invariant pricing (D49) | suboptimal pricing and investment outcomes (G19) |
| time-invariant pricing (D49) | failure to achieve first-best efficiency (D61) |
| retail prices do not reflect wholesale costs adequately (L11) | inefficiencies in demand and supply dynamics (D59) |
| attempts to correct investment levels through taxes or subsidies (H23) | new inefficiencies (D61) |
| increasing the share of customers on RTP (L42) | enhance market efficiency (G14) |
| increasing the share of customers on RTP (L42) | no reduction in overall capacity investment (E22) |
| RTP may benefit some customers (L97) | harm those already on RTP (R48) |