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Electricity pricing, Economics, Households, and Electric power consumption

In this paper, we review studies to understand how much households change their electricity consumption when there is a price change. Many studies find residential households have long‐term and short‐run elasticities behaving as economic theory would suggest. Long‐run elasticities range from −0.75 to −0.3, and short‐run elasticities range from −0.47 to −0.026. Household responsiveness seems to increase when paired with technology. The major gaps in research from the empirical economic literature are how low‐income and vulnerable Australian households could be affected by price changes and how Australians respond to within‐day variation in prices. [ABSTRACT FROM AUTHOR]

Economic policy, Prices, Economists, Economics, Capital investments, Carbon, Electricity, and Climate change

In this brief update on analysing the economic costs associated with carbon policy uncertainty, we outline the public policy processes commenced by the Commonwealth Government following the publication of Nelson et al. (2010). We also summarise the research completed by other economists testing the hypothesis that there are material economic costs associated with ongoing carbon policy uncertainty. Independent studies by Frontier Economics (2010), Deloitte (2011) and Sinclair Knight Merz (2011) all conclude that climate change policy uncertainty will result in sub-optimal capital investment within the electricity sector. In turn, this sub-optimal investment will manifest itself in unnecessary increases in electricity prices. [ABSTRACT FROM AUTHOR]

Econometrics, Economics, Prices, Electricity, and Numerical analysis

Information about the spatial structure of the transmission grid is relevant to understanding and predicting electricity prices, but this information has not been incorporated into empirical models of electricity prices in the literature. We propose the use of spatial econometric panel methods, discuss their formal characteristics in the context of electricity price data, and provide an application to a panel of PJM price data. Our econometric model includes a simple representation of the transmission system, and provides information about the effect of system constraints on the extent of electricity market integration. Empirical results confirm the existence of spatial patterns in electricity prices and illustrate their impact on estimation, forecasting, and interpolation. [ABSTRACT FROM AUTHOR]

Supply & demand, Consumer preferences, Energy consumption, Prices, Payment, Economics, and Electricity

Given a hybrid electricity market structure, demand response (DR) in wholesale electricity markets depends critically on the choice of customer baseline. This paper reviews alternative customer baseline designs, focusing on administrative and contractual approaches. Administrative customer baselines have been developed over many years to provide estimates of the counterfactual consumption levels that would have prevailed without demand-response programs. However, experience suggests that this approach is vulnerable to opportunities for gaming and could result in illusory demand reductions. With full locational marginal price (LMP) payment, this approach imputes double-payment incentives that could induce excessive demand reduction undermining the efficiency of DR programs. Alternatively, a contractual customer baseline approach provides transparent rights and obligations for a robust framework that restores efficient DR under full LMP payment. As a retail rate design that provides two-sided contractual customer baselines, demand subscription service and DR programs form a much needed connection between the wholesale and retail markets in ways that promote price-responsive demand in a smart grid future. [ABSTRACT FROM AUTHOR]

Industrial efficiency, Economic competition, Contracts, Supply & demand, Prices, Economics, Economic models, Electricity, and Clinical pathology

We use experiments to study the efficiency effects of adding the possibility of forward contracting to a spot market. We focus on the strategic implications of a forward market and consider both quantity and supply function competition. In both cases we compare the effect of adding a contract market to the introduction of an additional competitor. We find that, as theory suggests, for both types of competition the introduction of a forward market significantly lowers prices. The combination of supply function competition with a forward market leads to high efficiency levels. [ABSTRACT FROM AUTHOR]

Electric industries, Prices, Economics, and Electricity

This paper examines the short-lived electricity sector restructuring initiative of the province of Ontario, Canada's largest province. In May 2002, following years of planning and consultation Ontario opened its retail and wholesale electricity markets to competition. The summer of 2002 saw retail prices reach levels that consumers had never previously encountered. By December 2002, the provincial government froze retail electricity prices, covering approximately half of Ontario's electricity consumption. While the weather played a significant role in driving prices higher during the summer of 2002, other factors also played a major role. The other factors reviewed in this paper fall into two categories. The first category consists of market design problems, such as market rules (e.g., trading arrangements) and market structure (e.g., the degree of competition in the generation sector). The second category covers political economy problems, in particular the lack of political will to allow retail prices to reflect wholesale prices and to address effectively structural problems in the sector. Finally, this paper examines some of the new restructuring initiatives being pursued by the recently elected provincial government of Ontario as the province continues to struggle to bring order to its electricity sector. [ABSTRACT FROM AUTHOR]

Prices, Time series analysis, Econometrics, Economics, Electricity, and Numerical analysis

The ambition to create a single European market for electricity has been explicit since the Single European Act of 1988. This article investigates the degree to which this goal has been achieved in terms of the convergence of electricity prices. Two commonly used tests of convergence are applied, β-convergence and a cointegration test using annual electricity price data for nine European Union member states from 1978 to 2003. The results suggest that convergence did occur for most of the countries in the sample over this period. [ABSTRACT FROM AUTHOR]

Prices, Market volatility, Wholesale prices, Economic competition, Economics, and Electricity

A “pay-as-offered” or discriminatory price auction (DPA) has been proposed to solve the problem of inflated and volatile wholesale electricity prices. Using the experimental method we compare the DPA with a uniform price auction (UPA), strictly controlling for unilateral market power. We find that a DPA indeed substantially reduces price volatility. However, in a no market power design, prices in a DPA converge to the high prices of a uniform price auction with structural market power. That is, the DPA in a no market power environment is as anti-competitive as a UPA with structurally introduced market power. [ABSTRACT FROM AUTHOR]

Economic demand, Energy consumption, Elasticity (Economics), Supply & demand, Economics, Customer satisfaction, Prices, Electricity, and Surveys

The purpose of this paper is to analyze the short-run residential demand for electricity, where the short run is defined as the period within which a household's stock of electrical appliances and demographic profile is fixed. Authors have developed a model of short run electricity demand which incorporates this fixed configuration and explicitly treats the multi-level nature of electricity rate structures. The existence of the multilevel structure implies that the budget constraint is non-linear and that price and quantity are simultaneously determined. They have estimated the short-run demand parameters using individual household data from a large subset of the 1972-73 Consumer Expenditure Survey sample combined with specific rate schedule information obtained from the Federal Energy Regulatory Commission. This paper contributes to the analysis of electricity demand in several ways. First, the study is the only attempt to analyze micro data which combines specific rate information, a broad geographic focus and substantial sample variation in the important determinants of electricity demand. Second, authors have analyzed not only total electricity consumption, but also the distribution of consumption over various end-use categories such as heating or cooling.

Elasticity (Economics), Economics, Prices, Economic demand, Political planning, Force & energy, and Electricity

A serious impediment to the design of appropriate public policies with regard to the energy crisis is the lack of general agreement concerning the determinants of energy demand. This article considers the determinants of residential demand for electric energy. The results indicate that the long-run own-price elasticity of demand is equal to at least unity, contrary to the common assumption that demand is not responsive to price. One method used is to derive the elasticities of demand for a model incorporating marginal price from demand and price equations estimated using data for average price. When both the demand and price equations are log-linear, as is the case here, the elasticities of demand estimated with average price data are equal to those that would be obtained with marginal price. A model has been developed that permits consistent estimation of direct and total elasticities of demand for residential electricity. The estimated direct elasticities are robust and indicate that the long-run direct elasticity of demand with respect to electricity price is at least unitary. The cross-elasticity of demand with respect to gas price is significant but small. The total income elasticity of expenditure on electricity is less than one.

Employment, Rational expectations (Economic theory), Energy consumption, Price variance, Economics, White collar workers, Blue collar workers, Prices, Industrial productivity, Production (Economic theory), and Electricity

This article shows how a general nonlinear model of dynamic factor demands that is consistent with rational expectations can be estimated and used to study the effects over time of unexpected changes in factor prices, of a changing output level, and of policies in which future price changes are anticipated. Also, economist's empirical results provide some insight into the structure of aggregate production, the importance of adjustment costs, and the role of energy as a factor input. They would stress the following results. First, the data strongly reject the hypothesis of constant returns to scale within their specification of aggregate production. This puts into question earlier studies that impose constant returns, as well as empirical q theory models, which equate marginal and average q. On the other hand, the use of time-series data makes it difficult to disentangle the extent of returns to scale from various types of technical progress. Their rejection of constant returns may be dependent on assumption of Hicks-neutral technical change. Second, the data indicate that any adjustment costs on labor are small. This is significant because it runs counter to the widely held view that adjustment costs are a major cause of the procyclical movement of productivity. Of course our data aggregate blue- and white-collar workers, and disaggregated data might yield different results.

Economic demand, Pricing, Economics, Regression analysis, Economic models, Prices, Electric power consumption, Electricity, and Household appliances

A recent study by economist T.P. Roth incorporated average and marginal price as independent variables in estimating demand for electricity. This was in response to L.D. Taylor's admonition to the profession with regard to the neglect of this problem. The Roth model is a single equation formulation estimated with OLS. Therefore, it is subject to the various problems of such models and must rely on strong assumptions, that is, "white goods" are fixed, the Level of aggregation is appropriate and supply is given. Roth found that the sign on average price was possible and the sign on marginal price was negative in both estimating forms of the equation. The elasticity on marginal price is at the lower end of the range of other studies. The finding of a positive sign on the coefficient of average price can only be described as perverse. It would argue for the classification of electricity as an inferior good. Few economists would be willing to go along with such a finding. It is proposed therefore to test a model similar to the Roth model using data from a national survey. The model is presented in this article. Results are described and discussed, followed by a brief conclusion.

Risk premiums, Prices, Economics, and Electricity

Abstract: This paper conducts an empirical analysis of risk premiums in the German day-ahead Electricity Wholesale Market. We compare hourly price data of the European Energy Exchange (EEX) auction and of the continuous over-the-counter (OTC) market which takes place prior to the EEX auction. Data provided by the Energy Exchange Austria (EXAA) has been used as a snapshot of the OTC market two hours prior to the EEX auction. Ex post analysis found market participants are willing to pay both significant positive and negative premiums for hourly contracts. The largest positive premiums were paid for high demand evening peak hours on weekdays during winter months. By contrast, night hours on weekends featuring lowest demand levels display negative premiums. Additionally, ex ante analysis found a strong positive correlation between the expected tightness of the system and positive premiums. For this purpose, a tightness factor has been introduced that includes expectations of fundamental factors such as power plant availability, wind power production and demand. Hence, findings by can be supported that power traders in liberalised markets behave like risk-averse rational economic agents. [ABSTRACT FROM AUTHOR]

Pricing, Prices, Risk premiums, Cointegration, Marketing, Management, Economics, and Electricity

In contrast to forwards and futures on storable commodities, prices of long-term electricity forwards exhibit a dynamics different to that of short-term and midterm prices. We model long-term electricity forward prices through demand and supply of electricity, adjusted with a risk premium. Long-term prices of electricity, oil, coal, natural gas, emission allowance, imported electricity, and aluminum are modeled with a vector autoregressive model (VAR). For estimation, we use weekly prices of far-maturity forwards relevant for the Nordic electricity market. Although electricity prices experienced a few substantial shocks during the period we analyzed, there is no evidence of a structural break. Cointegration analysis reveals two stationary long-run relationships between all variables except the gas price, indicating that these variables move together over time. We find some influence of the risk premium, however not on the long-term electricity forwards at Nord Pool. [ABSTRACT FROM AUTHOR]

Gaussian distribution, Futures, Derivative securities, Spot prices, Prices, Economics, Mathematical models, Economic forecasting, Distribution (Probability theory), Electric utilities, Basis (Futures trading), Financial futures, and Electricity

Abstract: Using spot and futures price data from the German EEX Power market, we test the adequacy of various one-factor and two-factor models for electricity spot prices. The models are compared along two different dimensions: (1) We assess their ability to explain the major data characteristics and (2) the forecasting accuracy for expected future spot prices is analyzed. We find that the regime-switching models clearly outperform its competitors in almost all respects. The best results are obtained using a two-regime model with a Gaussian distribution in the spike regime. Furthermore, for short and medium-term periods our results underpin the frequently stated hypothesis that electricity futures quotes are consistently greater than the expected future spot, a situation which is denoted as contango. [Copyright &y& Elsevier]

Economics, Prices, Supply & demand, and Electricity

The paper examines the economic and regulatory factors that led to an explosion in wholesale power prices, supply shortages, and utility insolvencies in California's electricity sector from May 2000 to June 2001. The structure of California's restructured electricity sector and its early performance are discussed. The effects on wholesale market prices of rising natural gas prices, increasing demand, reduced power imports, rising pollution credit prices, and market power, beginning in the summer of 2000, are analysed, The regulatory responses leading to utility credit problems and supply shortages are identified. The effects of falling natural gas prices, reduced demand, state power‐procurement initiatives, and price‐mitigation programmes on prices beginning in June 2001 are discussed. A set of lessons learned from the California experience concludes the paper. [ABSTRACT FROM PUBLISHER]

Commodity futures, Electric power production, Commercial products, Prices, Economics, and Electricity

This note investigates price differentials between electricity forwards and portfolios of short-term futures with identical delivery periods at the Nordic Power Exchange (Nord Pool). Since both contracts are traded at the same exchange, there is no influence of, for example, different market microstructure and default risk when examining the effect of the marking-to-market of futures on the price differential. Although the prices of the futures portfolios are, on average, below the corresponding forward prices, these price differentials are, on average, not statistically significant and not economically significant when taking transaction costs into account. Given the characteristics of the electricity contracts under observation, this is consistent with the predictions of the model and indicates efficient pricing in the Nord Pool forward market in contrast to previous results. [Copyright &y& Elsevier]