The Efficiency of Dynamic Energy Prices

Andrew J. Hinchberger, Mark R. Jacobsen, Christopher R. Knittel, James M. Sallee, and Arthur A. van Benthem

October 2024

The marginal cost of electricity fluctuates hour-by-hour, yet retail customers typically face flat prices. Using data from all seven US wholesale markets and a new method to evaluate alternative rates set in advance that accounts for equilibrium price effects, we estimate efficiency gains from time-varying price schedules that better align price with cost. We have three main results. First, time-of-use rates and critical-peak pricing, the two most common time-varying rate plans, each correct about 10% of mispricing. Second, complex rate structures based on historical prices often backfire. Third, real-time pricing with price ceilings can capture most potential efficiency gains while limiting customer risk.

Keywords: electricity, time-of-use pricing, critical-peak pricing, real-time pricing, efficiency

JEL: L94, L97, Q41, Q48