Predicting California Deman Response

How do customers react to hourly prices?

As California embarks on a Statewide Pricing Pilot (SPP) for residential and small commercial (200 kW) customers, policymakers and participants in the proceedings are asking several questions:

1. What elasticity estimates should we expect the pilot to produce?
2. Will a voluntary SPP program produce less load reduction than a mandatory program?
3. What is the likely response of the participants, and will that response differ as a function of usage level, appliance holdings, or other non-price factors?

The answers to those questions can be anticipated somewhat by reviewing the existing literature on price responsiveness of the residential and small commercial customer segment.¹ The data, summarized in this article, is based on experiments and studies run by the Department of Energy, academic researchers, and utility companies around the world during the past three decades.

Standard economic theory holds that customers react to changes in prices by adjusting their demand for the goods in question. As prices rise, customers reduce the quantity demanded. As prices drop, customers increase the quantity demanded. The responsiveness of customers to price changes is called their .

One measurement of elasticity is the customer's change in consumption in the same time period in which the price change occurs. Another measurement is the customer's shift in consumption across time periods-such as peak to off-peak-in response to price changes that alter the price relationship between the two time periods (for example, changing the price ratio from 1:1 to 2:1). These two measurements are called the and , respectively .