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A Survey of Literature on

Dynamic Pricing of Electricity


Authored by: Presented by:
Goutam Dutta Krishnendranath Mitra
Krishnendranath Mitra

Presented at:
XIX Annual International Conference of the Society of
Operations Management.
December 12, 2015.
Indian Institute of Management Calcutta (IIMC), Kolkata, India.
Introduction
FLATENED LOAD CURVE
CAPACITY

PRICE

LOAD

TIME
• Electricity consumers generally face flat rate tariffs
• Thus they have no incentive to shift their consumption from one time
of the day to another
• This creates peaks and troughs in a load curve
• New power generation capacities need to be installed just to meet peak
demand and such facilities remain idle during off-peak hours
• Dynamic prices can modify consumption behaviour and flatten load
curves and thus retard investment for new capacity addition
Contents of this Presentation
• Electricity Market
• Dynamic Pricing

Discussion on works on:


• Experiments related to dynamic pricing of electricity
• Retail and wholesale electricity pricing
• Forecasting of price and demand
• Elasticity of electricity demand
• Consumers’ willingness-to-pay for electricity
• Effect of technology
• Market segmentation
• Electricity consumption scheduling
• Areas for future research
Electricity Market
Electricity Transmission
Producers and Participants of the Power
Distribution Market:

• Generating companies
(Power producers)
Regulator Electricity • Consumers ( Industrial,
Exchange Consumers Commercial and
Household)
• Transmission
companies
• Distribution
Electricity companies
Sellers
• Power Exchanges
• Regulators
Bilateral Contracts Transaction from
Through Exchange seller
Dynamic Pricing
• The practice of pricing items at a level determined by a
particular customer's (or particular group of
customers’) perceived ability to pay
• It is a common practice in several industries such as
hospitality, travel, entertainment and retail
• Dynamic pricing is legal, and the general public has
learned to accept dynamic pricing when purchasing
airline tickets or reserving hotel rooms
• Dynamic pricing helps in absorbing consumer surplus
and thus maximizing revenue
Experiments Related to Dynamic
Pricing of Electricity
Some experimental findings:
• Demand response depend on ratio of the peak and off-
peak prices and such curves are non-linear (Faruqui &
Sergici, 2014)
• Price responsiveness is higher in hotter climates and
with enabling technology. Residential response is more
than commercial and small industrial (Faruqui et al.,
2014)
• Demand is mostly income and price inelastic but varies
with lifestyle, demographic and geographical factors
(Filippini & Pachauri, 2004) (Bose & Shukla, 1999)
(Tiwari, 2000) (Zhou & Teng, 2013)
Various Pricing Schemes

(Faruqui et al. 2012)


Retail Electricity Pricing
• Dynamic prices are more effective than flat rates as
these can reduce consumer surplus (Desai and Dutta,
2013)
• Price of electricity can be designed as an weighted
average of present and past wholesale prices (Harris,
2006)
• Price designs may depend on several factors like
power production method, storage systems involved,
advanced metering and consumers’ consumption
patterns (Stephenson et al., 2001)
• Pricing designs should consider welfare issues for both
consumers and retailers (McDonald & Lo, 1990)
• Mathematical models may also be developed to
determine optimal price. A self-organizing pricing
scheme is also designed by (Seetharam et. al., 2012)
Wholesale Electricity Pricing
• Wholesale market price is determined by bidding
process (Kirschen et al., 2000)
• Two level optimized bidding is studied at a
centralized level and a decentralized level (Weber
and Overbye, 1999) (Li et al., 1999)
• Focus on revenue maximization rather than on
cost minimization (Li et al., 1999)
• ‘Payment cost minimization’ technique is better
that ‘bid cost minimization’ technique from the
consumer welfare point of view (Zhao et al.,
2010)
Forecasting of Price
• Dynamic regression and transfer function
approaches (Nogales et al., 2002)
• ARIMA models (Contreras et al., 2003)
(Zareipour et al., 2006)
• Artificial neural network computing technique
(Mandal et al., 2006)
• Kernel-based day-ahead forecasting method
(Kekatos et al., 2013)
Forecasting of Demand
• Comparison of seasonal ARIMA, neural networks,
double seasonal exponential smoothening, and
principal component analysis (Taylor et al., 2006)
• Double seasonal Holt-Winters exponential
smoothening with autoregressive model (Taylor,
2003)
• Trigonometric grey model (GM) prediction approach
(Zhou, Ang and Poh, 2006) (Akay and Atak, 2007)
• Multiple linear regression and artificial neural
networks (Saravanan et al., 2012)
• Incorporate weather influences (Mirasgedis et al.,
2006)
Elasticity of Electricity Demand
• Elasticity of demand can be short-run or long-run
(Borenstein et al., 2002)
• Low demand elasticity requires large price spikes
(Wolak, 2011) (Kirschen et al., 2000)
• Demand elasticity varies seasonally or even at
different times of the day (Ifland et al., 2012)
(Kirschen, 2003) (Shaikh & Dharme, 2009)
• There is no universal formula for determining
demand response which varies across customer
types, events, and types of price structures
(Braithwait, 2010)
Consumers’ Willingness-to-Pay for
Electricity
• Contingent valuation method (Devicienti et al.,
2005) (Twerefou, 2014)
• Choice experiment method (Ozbafli and Jenkins,
2013)
• Variance-based ‘Partial Least Squares’ Structural
Equation Modeling (Gerpott and Paukert, 2013)
• Estimate the parameters of a binary logit model
from a random utility model from stated
preference data (An et al., 2002)
Effect of Technology
• Consumers respond to flexible prices even
without the help of indicating technology but
night-hour consumptions are enhanced by
technology (Ifland et al., 2012)
• Smart grid technologies can reduce overall
consumption without reducing the level of
comfort (Kaluvala and Forman, 2013)
• Increases the electric grid’s efficiency (Quillinan,
2011) (Faruqui & Palmer, 2012)
• Useful applications can be ‘appliance control’,
‘notification’, ‘information feedback’, ‘energy
management’
Market Segmentation
Segmentation can be based on :
• Attitudes, motivations, usage patterns, buying
behavior, characteristics, consumer service,
green credentials, innovative tariffs, and
guarantee of no price inflation for a certain
period (Moss and Cubed, 2008) (Simkin et al.,
2011) (Ifland et al., 2012)
• Segmentation can be based on consumption
data. Discriminant analysis is helpful in such
segmentation. (Panapakidis et al., 2013)
(Varga & Czinege, 2007)
Market Segmentation
Low income group is focused as a prominent market
segment as it can be most affected by flexible prices
• They are highly responsive to price signals (Faruqui et
al., 2012) (Wolak, 2010)
• They can also have low price responsiveness (Wang et
al., 2011)

Segmentation mostly ineffective because:


• Lack of comprehensive data, emphasis on
technological solutions alone for demand side
management and a tendency to stay within the
traditional broad industry segments of industrial,
commercial, and residential customers (Yang et al.,
2013)
Electricity Consumption Scheduling
• Consumption scheduling can be done by Mixed Integer
Linear Programming by classifying appliances into
different types (Agnetis et al., 2013) (Hubert &
Grijalva, 2012)
• Maximization of renewable energy is incorporated
while appliance scheduling (Liu et al., 2012) (Dupont et
al., 2012)
• Scheduling of operation of appliance in individual
homes must be linked with scheduling of electricity
consumption in the connected grid (Kishore & Snyder,
2010)
• Scheduling of home appliances can be coupled with
social welfare optimality and optimal revenue for
power suppliers (Li et al., 2011) (Cui et al., 2012)
Areas for Future Research
• Determining the customers’ willingness to adopt
dynamic tariffs over flat rates
• Measuring customers’ willingness-to-pay for
electricity in order to design dynamic prices
• Determining a demand-price relationship for
electricity and factors affecting it
• Identifying appropriate basis of segmentation of
electricity markets
• Development of new technological products and
better consumption scheduling algorithms
• Identifying the social and environmental cost of
shifting to dynamic tariffs