Self-Regulating Electricity Markets?

Adilov, Nodir | Light, Tom | Schuler, Richard | Schulze, William | Toomey, David | Two-sided Markets for Energy | Zimmerman, Ray D.
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N. Adilov, T. Light, R. Schuler, W. Schulze, D. Toomey, R. Zimmerman
Advanced Workshop in Regulation and Competition, Rutgers Center for Research in Regulated Industries, 17th Annual Western Conference, San Diego, CA, June 24, 2004.

An experimental structure is demonstrated that represents end-use customers in electricity markets who can substitute part of their usage between day and night. Each customer's demand relationship is represented by a two-step value function for each period, disaggregated from observed market demand relationships, that varies between day and night and during heat-waves. Three alternative demand-side market structures are evaluated: 1) customers pay the same fixed price (FP) in all periods - - the base case, 2) a demand response feature (DRP) is added to the fixed price case in periods of supply shortages, wherein buyers receive a pre-specified credit for reduced purchases, and 3) a real time pricing (RTP) case where prices are forecast for the upcoming day/night pair, then buyers select their quantity purchases sequentially and are charged the actual market-clearing price, period-by-period. After demonstrating the ability of buyers to make efficient purchases, six experienced sellers with experience in exercising market power were paired with seventeen buyers over twenty two auctions (eleven day-night pairs) that included heat waves and unit outages. The same periods were repeated under each of the three different market treatments, and the RTP structure resulted in the greatest market efficiency, despite the difficult cognitive problem it poses for buyers. Both DRP and RTP reduced the severity of price spikes as compared to the FP structure. A preference poll comparing DRP and RTP was conducted after each treatment. In one experiment, 74% of the participants said they preferred DRP before trying RTP, but 64% chose RTP afterward, a statistically significant reversal of preferences, and in a second experiment, 53% preferred DRP initially, but 68% selected RTP after experiencing both treatments. Finally, the relationship between total system load and line flows was examined under each of the three market treatments and for a simulated fully-regulated regime. The relationship demonstrated under the regulated regime deteriorates under FP, but is re-established under the DRP and RTP market structures.