NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Customer Risk from Real-Time Retail Electricity Pricing: Bill Volatility and Hedgability

Severin Borenstein

NBER Working Paper No. 12524
Issued in September 2006
NBER Program(s):   IO   AP   EEE

One of the most critical concerns that customers have voiced in the debate over real-time retail electricity pricing is that they would be exposed to risk from fluctuations in their electricity cost. The concern seems to be that a customer could find itself consuming a large quantity of power on the day that prices skyrocket and thus receive a monthly bill far larger than it had budgeted for. I analyze the magnitude of this risk, using demand data from 1142 large industrial customers, and then ask how much of this risk can be eliminated through various straightforward financial instruments. I find that very simple hedging strategies can eliminate more than 80% of the bill volatility that would otherwise occur. Far from being complex, mystifying financial instruments that only a Wall Street analyst could love, these are simple forward power purchase contracts, and are already offered to retail customers by a number of fully-regulated utilities that operate real-time pricing programs. I then show that a slightly more sophisticated application of these forward power purchases can significantly enhance their effect on reducing bill volatility.

download in pdf format
   (248 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w12524

Published: Severin Borenstein, 2007. "Customer Risk from Real-Time Retail Electricity Pricing: Bill Volatility and Hedgability," The Energy Journal, International Association for Energy Economics, vol. 28(2), pages 111-130. citation courtesy of

Users who downloaded this paper also downloaded these:
Borenstein and Holland w9922 On the Efficiency of Competitive Electricity Markets With Time-Invariant Retail Prices
Borenstein w11594 Wealth Transfers from Implementing Real-Time Retail Electricity Pricing
Patrick and Wolak w8213 Estimating the Customer-Level Demand for Electricity Under Real-Time Market Prices
Borenstein w15822 The Redistributional Impact of Non-linear Electricity Pricing
Holland and Mansur w13508 Is Real-Time Pricing Green? The Environmental Impacts of Electricity Demand Variance
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us