Making the Best of the Second-Best: Welfare Consequences of Time-Varying Electricity Prices
This paper examines the extent to which small commercial and industrial establishments respond to a four-hour increase in retail electricity prices invoked by individual utilities during peak demand periods 15 times per year. This policy is intended to reduce electricity consumption when generation costs are highest. I find that the approximately tripled prices reduce establishment peak electricity usage by 13.4%. Using a model of capacity investment decisions, I find the program delivers 43% of the benefits of the first-best policy of continuously varying prices and suggest two simple improvements in program design that could nearly double these welfare gains.