Transcript Testing for Subadditivity of Vertically Integrated

THE RESPONSE OF INDUSTRIAL
CUSTOMERS
TO ELECTRIC RATES BASED UPON
DYNAMIC MARGINAL COSTS
Joseph A. Herriges, S. Mostafa
Baladi, Douglas W. Caves, and
Bernard F. Neenan
Kamil, ID: 87043531
Recent advances in technology and in the theory of
electric utility operations and planning have led to
an increased interest in rate and service options
that are differentiated over short time intervals.
OBJECTIVE: to measure the response of large
industrial customers to dynamic, fully timedifferentiated, marginal cost-based electricity
rates over a broad range of industries.
Real-time pricing
(RTP) of electricity encompasses a range of
possible
service options, featuring prices that reflect
the constantly changing costs of supplying
electricity
Compared to conventional or time-of-use
rates, real-time prices more accurately
represent
marginal costs at each point in time.
This paper describes the
results of an RTP
experiment at Niagara
Mohawk Power Corporation.
in the 1970s and 1980s. However,
there are fundamental differences between the
earlier experiments and current RTP
experiments.
First, because RTP experiments involve
large users, both the utility and the customer risk
substantial funds, often measured in the millions
of dollars.
the RTP studies are targeted at customers
who possess the commercial and political
wherewithal to frustrate mandatory participation.
Hence customers in each experiment are volunteers,
creating the potential for self-selection bias.
The HIPP tariff (Hourly Integrated Pricing Program)
1) was designed to provide customers
with hourly price signals set as close as
possible to marginal cost
2) is a two-part tariff, consisting of a marginal cost
based hourly energy price ($/kWh) and an access
charge that is independent of the customer's
current usage.
3) Notification of the twenty-four hourly prices for
each day is given to the customer on the afternoon
of the preceding business day.
the HIPP program
compared
to the standard timeof-use tariff.
The access charge was
designed to satisfy two
principles:
(1) independence from
the customer's usage
patterns under HIPP
(2) ex ante revenue
neutrality
The target population for the experiment is
Niagara Mohawk's large commercial and industrial
Class
(i) Large users were chosen because they are
most likely to generate RTP benefits that exceed
metering, communications, and administration
costs.
(ii) They are more likely to invest the
resources required to understand and evaluate
the HIPP tariff.
(iii) Niagara Mohawk has historical
load research data for these firms, which
are necessary for calculating the HIPP access
charge and for analyzing customer response to
RTP.
(i) The first set of statistics in table 2 shows
that the load growth of the control group, 5.1%,
surpassed that of the test group, 1.5%. Thus,
HIPP did not result in an increase in total energy.
(ii) The second set of descriptive statistics compares the average price of electricity
under the HIPP and standard rates for both test and control customers using usage
levels from the eight test months. As expected, given the revenue neutrality of the
HIPP rate, there is little difference in the average price of electricity under the
two tariffs for control customers. The test customers‘ average price is over 6%
lower under HIPP than under the standard rate. Given their modest load growth of
1.5%, this difference in average price indicates an ability to shift loads away from
highpriced hours.
(iii) The third set of statistics examines test period
usage relative to the baseline loads during high
priced hours. The hour of greatest interest to the
utility has traditionally been the hour of system
peak. Table 2 shows that during this hour the
average test customer reduced loads from their
baseline level by 13.2%, while the average control
customer increased loads by 4.5%.
B. Price Index Analysis
where Ek(t) and Pk(t) denote the usage and
price levels during the hour t (t = 1, . . ., T) of
experimental period k (k = 0 for baseline; = 1
for test).
Specifically,
(i) the response index is defined as R=(F1/F0)/(L1/L0).
(ii) adjusts for the change in the level of electricity prices
imbedded in the HIPP tariff and, thus, isolates the change in
unit costs due to load shifting.
(iii) if the firm does not respond
to the HIPP price signal, then F'/F0 = L'IL0
and R = 1
Responses are classified into four categories: strong (R < 0.990), moderate (0.990 <
R < 0.995), weak (0.995 < R < 1), and none (R 2 1). Again, the results suggest that
test customers responded to HIPP prices by shifting loads. The individual customer
monthly results show that 32% of the test customers monthly results fall into the
moderate to strong response categories, while only 14% of the control customers
fall into these categories.
C. Econometric Analysis
C= C{P[P(1), ..,~P(T)], Q(1),. .., Q(M), Y}
These price changes cause intraday and interday shifts as determined by the
two elasticity parameters, σH = 1- ʎ and σD = 1 - y. A price change in any
hour causes usage shifts in other hours of the same day according to the
partial Allen elasticity of substitution σH. The resulting change in the daily
price index Dd causes shifts in other days of the month through the partial
Allen elasticity of substitution parameter, σD. The parameters ad, h and Pd
determine the load shapes under flat rates.
The interday and intraday
elasticities
are all positive, as expected,
and most are
statistically different from
zero at a 1%!!!
Conclusion
(i) Some firms are able to shift their usage
patterns in response to real-time rates, and in
particular at the hour of system peak.
(ii) The response to RTP, however, was not
uniform among participating firms, with two
customers providing the bulk of the measured
response
Thank you for attention