Customer Risk from Real-Time Retail Electricity Pricing: Bill Volatility and Hedgability / Severin Borenstein.

Format:

Book

Author/Creator:

Borenstein, Severin.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w12524.

NBER working paper series no. w12524

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Customer Risk from Real-Time Retail Electricity Pricing

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2006.

Summary:

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.

Notes:

Print version record

September 2006.