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Predicting California Deman Response

How do customers react to hourly prices?
Fortnightly Magazine - July 1 2003

and White suggest that there are effectively two types of households with respect to electricity demand behavior: those whose use exhibits some electricity price elasticity, and those who do not and are evidently price insensitive. They developed the chart shown in Figure 3 to show the distribution of price elasticities for the California population. Figure 3 brings into focus the substantial heterogeneity in households' price sensitivities.

The striking feature of this distribution is its asymmetric, negatively skewed form. This pattern indicates that about half of all households will make very little change in their electricity consumption in response to a price change. The other half respond actively to price changes, with many consumers-those on the far right- taking aggressive load reduction action when prices go up.

This heterogeneity is consistent with findings of recent focus groups in California associated with the SPP, where residential customers fell into three categories, depending on their receptivity to dynamic pricing: indifferent, concerned, and enthused. 5 Presumably, in a voluntary program, few of the first group would participate-including reducing peak demand-some of the second, and most of the third.

Our goal here is to inform policymakers of the wealth of data that has been gathered on residential price response. We invite the reader to draw his or her own conclusions from the data. The California SPP will add another important data point to the existing body of knowledge. As discussed in the adjacent article by Faruqui and George (see article, p. 33), the experimental design methodology will be familiar to those who have been associated with these types of programs conducted over the past three decades in the United States and abroad. These researchers have learned a lot about the appropriate design parameters over these three decades. Similarly, looking to the findings of this body of literature, we can get some guidance and insight into the nature of and the extent to which these customers will respond in a voluntary program that gives them an opportunity to make informed energy consumption decisions in response to the price signals received based on the time-varying cost of energy

  1. This article focuses on the literature for residential and small commercial customers only. For a discussion of price elasticity for large commercial and industrial customers see Lafferty et al, "Demand Responsiveness in Electricity Markets", Office of Markets, Tariffs and Rates, Federal Energy Regulatory Commission, Jan. 15, 2001.
  2. Canada, the U.K., France, Switzerland, and Denmark.
  3. Comments of the California Office of Ratepayer Advocates in Rulemaking 02-06-001, April 28, 2003.
  4. The RECS is conducted every three to four years by the U.S. Department of Energy to collect information on household appliances and energy use. The survey is a nationally representative probability sample of households, with representative subsamples for several large states. The study used the California subsamples of the 1993 and 1997 survey waves, which were the most recent available. Together they provide information on 1,307 California households.
  5. Hiner, H., "Market Response to Time-Varied Pricing," Presentation at AESP/EPRI Pricing Conference, Chicago, Illinois, May 14, 2003.


Flavors of Elasticity of Demand: A Reference 1