Electricity pricing Demand response

explanation of demand response effects on quantity (q) - price (p) graph. under inelastic demand (d1) extremely high price (p1) may result on strained electricity market.

if demand response measures employed demand becomes more elastic (d2). lower price result in market (p2).



it estimated 5% lowering of demand result in 50% price reduction during peak hours of california electricity crisis in 2000/2001. market becomes more resilient intentional withdrawal of offers supply side.

in electric power systems, or consumers pay fixed price per unit of electricity independent of cost of production @ time of consumption. consumer price may established government or regulator, , typically represents average cost per unit of production on given timeframe (for example, year). consumption therefore not sensitive cost of production in short term (e.g. on hourly basis). in economic terms, consumers usage of electricity inelastic in short time frames since consumers not face actual price of production; if consumers face short run costs of production more inclined change use of electricity in reaction price signals. pure economist might extrapolate concept hypothesize consumers served under these fixed-rate tariffs endowed theoretical call options on electricity, though in reality, other business, customer buying on offer @ agreed price. customer in department store buying $10 item @ 9.00 might notice 10 sales staff on floor 1 occupied serving him or her, while @ 3.00 pm customer buy same $10 article , notice 10 sales staff occupied. in similar manner, department store cost of sales @ 9.00 might therefore 5-10 times of cost of sales @ 3.00 pm, far-fetched claim customer, not paying more article @ 9.00 @ 3.00 pm, had call option on $10 article.

in virtually power systems electricity produced generators dispatched in merit order, i.e., generators lowest marginal cost (lowest variable cost of production) used first, followed next cheapest, etc., until instantaneous electricity demand satisfied. in power systems wholesale price of electricity equal marginal cost of highest cost generator injecting energy, vary level of demand. variation in pricing can significant: example, in ontario between august , september 2006, wholesale prices (in canadian dollars) paid producers ranged peak of $318 per mw·h minimum of - (negative) $3.10 per mw·h. not unusual price vary factor of 2 5 due daily demand cycle. negative price indicates producers being charged provide electricity grid (and consumers paying real-time pricing may have received rebate consuming electricity during period). occurs @ night when demand falls level generators operating @ minimum output levels , of them must shut down. negative price inducement bring these shutdowns in least-cost manner.

two carnegie mellon studies in 2006 looked @ importance of demand response electricity industry in general terms , specific application of real-time pricing consumers pjm interconnection regional transmission authority. latter study found small shifts in peak demand have large effect on savings consumers , avoided costs additional peak capacity: 1% shift in peak demand result in savings of 3.9%, billions of dollars @ system level. approximately 10% reduction in peak demand (achievable depending on elasticity of demand) result in systems savings of between $8 $28 billion.

in discussion paper, ahmad faruqui, principal brattle group, estimates 5 percent reduction in peak electricity demand produce approximately $35 billion in cost savings on 20-year period, exclusive of cost of metering , communications needed implement dynamic pricing needed achieve these reductions. while net benefits less claimed $35 billion, still quite substantial. in ontario, canada, independent electricity system operator has noted in 2006, peak demand exceeded 25,000 megawatts during 32 system hours (less 0.4% of time), while maximum demand during year on 27,000 megawatts. ability shave peak demand based on reliable commitments therefore allow province reduce built capacity approximately 2,000 megawatts.