Industrial response to spot electricity prices: some empirical evidence

Abstract

Time of day prices for electricity are usually preferable to constant rates, as the true cost of generating energy varies over the course of a day. But time of day rates are still inefficient, because prices do not change in step with day by day random fluctuations in actual generating costs. Spot prices, which change every five minutes, can avoid this inefficiency by tracking actual marginal cost. This paper empirically estimates the ability of industrial customers to respond to rapidly varying prices. The conclusion is that some customers will be able to react quickly to such prices. Because the estimates were made from a rate structure which is not a full spot pricing system, the magnitude of customer response remains problematic. Also, it appears that the utility in questions could make a minor change to its rate structure which would help both it and its customers.