The real-time price elasticity of electricity

What is it about?

The real-time price elasticity of electricity contains important information on the demand response of consumers to the volatility of peak prices. Despite the importance, empirical estimates of the real-time elasticity are hardly available. This paper provides a quantification of the real-time relationship between total peak demand and spot market prices. We find a low value for the real-time price elasticity, which may partly be explained from the fact that not all users observe the spot market price. If we correct for this phenomenon, we find the elasticity to be fairly low for consumers currently active in the spot market. If this conclusion applies to all users, this would imply a limited scope for government intervention in supply security issues.

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Why is it important?

In many markets, prices provide a mechanism to make sure that supply equals demand. This is known as market clearing. If a good or service can't be stored, market clearing should be immediate to prevent shortages. Electricity can't be stored and demand can at time be very volatile. Moreover, shortages can have severe effects, as they can cause system-wide black-outs. It is therefore crucial that the demand for electricity responds to prices at a very short notice. The analysis in this paper suggests that this is indeed the case.