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Real-Time Pricing: Ready for the Meter? An Empirical Study of Customer Response

Fortnightly Magazine - November 1 1998

that when the data are not broken down by price, the estimated negative coefficients of elasticity indicate that customers can shift their usage patterns in response to real time rates. Moreover, there is a positive relationship between quantity of electricity consumed in the present period and the quantity of electricity consumed at the same period the day before, as indicated by the fact that the coefficients for lagged quantity (Yt-1) are all positive. Only one out of four customers (that being Customer 2) shows a figure significantly different from zero at the 5-percent confidence level.

The effect of temperature in this case appears confusing. All other things being equal, an increase in temperature should increase electricity consumption, and therefore the estimated coefficient should be positive. That is the case here only for Customer 3, for whom the elasticity is not significantly different from zero at the 5-percent confidence level.

Table 3 shows the demand equation estimates for prices below 6 cents. The estimated own-price elasticity of demand coefficients are positive for three out of four customers. Also, for three out of the four customers, these own-price elasticity estimates are significantly different from zero at the 5-percent confidence level, as seen by the t values. This implies that customers do not significantly change their consumption for change in prices under 6 cents, that 6 cents is indeed a critical price mark.

Table 4 shows the estimated demand equation for prices above 6 cents per kWh. The estimated own-price elasticity of demand coefficients are negative and are significantly different from zero at the 5-percent confidence level for three out of the four customers. The analysis once again supports our hypothesis that customers do shift their usage patterns in response to real-time rates.

The effect of temperature on consumption of electricity seems to be mixed. The coefficient is positive for three out of four customers. All the temperature elasticities are significantly different from zero at the 5-percent level for Customers 1 and 2 and are significantly different from zero at the 1-percent level for Customers 3 and 4.

Do Prices Always

Clear the Market?

In our study we assumed that the supply curve of electricity facing a typical customer is perfectly elastic - that at a given price, the customer can consume unlimited quantities of electricity. That has been a standard assumption in all the demand analysis studies performed on time-of-use and time-of-day pricing, but remains valid if customer demand doesn't exceed available supply at the real-time price.

To validate that assumption, we put together a forecast of customer loads and of the availability and cost of generation and transmission resources owned or otherwise available to Pareto. We did this to measure the possible effects on Pareto's prices caused by the change in consumption, to determine whether our findings might have been affected by customer demand.

In our case, Pareto reserves the right during a system emergency to pre-empt its hourly confirmed prices and impose a price of $3.00 per kWh. Pareto may exercise this right upon a one-hour notice and no more than 12