Demand-side bidding will reduce the level and volatility of electricity prices.

AuthorRassenti, Stephen J.
PositionLab Report

With the move to deregulate wholesale electricity prices in the United States, each state or region needed to develop a plan for restructuring its electric-utility industry and to establish the rules of an auction market for determining the hourly wholesale price of energy. All these new markets adopted supply-side bidding mechanisms--designed for the most part by intermediaries, consultants, and suppliers, with acquiescence by consumers--in which generator firms submitted bids to supply whatever quantity of energy would be demanded by wholesale buyers for resale to final consumers at regulated prices. In this setup, all final consumers, regardless of the individual circumstances of their need for an uninterruptible flow of energy, would be guaranteed that their demands would be satisfied. This policy of meeting all "must serve" demand, as it is known in the industry, was inherited from a rigid regulatory system that had politicized the reliability of service to all consumers without regard to cost, differing consumer priorities for service, or corresponding differences in willingness to pay for reliability of service. Consequently, retail consumers were shielded from exposure to the great natural variability in energy cost, from nighttime lows to daytime highs and across seasons, by an averaging of these cost variations into flat-rate prices.

The driving justification for deregulation is to improve performance by exposing the industry and its customers to cost-based price signals, a policy that has worked well in the transportation (air, truck, rail) and natural gas industries. Unfortunately, in the electricity industry, deregulation in wholesale markets has not been accompanied by concurrent attention to the deregulation of retail markets, and this discrepancy has exposed the industry to unusual stresses comparable to the energy crunch of the 1970s. Because cost-effective means for producing and storing electricity during off-peak periods, to be consumed later during peak-use periods, are very limited, peak-period consumers account for the required higher energy and investment costs incurred to satisfy their demands. Efficient pricing requires on-peak consumers to pay substantially higher prices than off-peak consumers because the on-peak unit cost can easily be ten or more times the off-peak cost.

The same need to meet instantaneous demand applies to the unregulated prices of the motel industry. Competition in that industry long ago gave...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT