Efficiency and marginal cost pricing in dynamic competitive markets with friction

This paper examines a dynamic general equilibrium model with supply friction. With or without friction, the competitive equilibrium is efficient. Without friction, the market price is completely determined by the marginal production cost. If friction is present, no matter how small, then the market price fluctuates between zero and the "choke-up" price, without any tendency to converge to the marginal production cost, exhibiting considerable volatility. The distribution of the gains from trading in an efficient allocation may be skewed in favor of the supplier, although every player in the market is a price taker.Dynamic general equilibrium model with supply friction, choke-up price, marginal production cost, welfare theorems

Volatility of Power Grids under Real-Time Pricing

The paper proposes a framework for modeling and analysis of the dynamics of supply, demand, and clearing prices in power system with real-time retail pricing and information asymmetry. Real-time retail pricing is characterized by passing on the real-time wholesale electricity prices to the end consumers, and is shown to create a closed-loop feedback system between the physical layer and the market layer of the power system. In the absence of a carefully designed control law, such direct feedback between the two layers could increase volatility and lower the system's robustness to uncertainty in demand and generation. A new notion of generalized price-elasticity is introduced, and it is shown that price volatility can be characterized in terms of the system's maximal relative price elasticity, defined as the maximal ratio of the generalized price-elasticity of consumers to that of the producers. As this ratio increases, the system becomes more volatile, and eventually, unstable. As new demand response technologies and distributed storage increase the price-elasticity of demand, the architecture under examination is likely to lead to increased volatility and possibly instability. This highlights the need for assessing architecture systematically and in advance, in order to optimally strike the trade-offs between volatility, economic efficiency, and system reliability

Distributed Control Design for Balancing the Grid Using Flexible Loads

International audienceInexpensive energy from the wind and the sun comes with unwanted volatility, such as ramps with the setting sun or a gust of wind. Controllable generators manage supply-demand balance of power today, but this is becoming increasingly costly with increasing penetration of renewable energy. It has been argued since the 1980s that consumers should be put in the loop: " demand response " will help to create needed supply-demand balance. However, consumers use power for a reason, and expect that the quality of service (QoS) they receive will lie within reasonable bounds. Moreover, the behavior of some consumers is unpredictable, while the grid operator requires predictable controllable resources to maintain reliability. The goal of this chapter is to describe an emerging science for demand dispatch that will create virtual energy storage from flexible loads. By design, the grid-level services from flexible loads will be as controllable and predictable as a generator or fleet of batteries. Strict bounds on QoS will be maintained in all cases. The potential economic impact of these new resources is enormous. California plans to spend billions of dollars on batteries that will provide only a small fraction of the balancing services that can be obtained using demand dispatch. The potential impact on society is enormous: a sustainable energy future is possible with the right mix of infrastructure and control systems

Efficiency and marginal cost pricing in dynamic competitive markets with friction

[This item is a preserved copy. To view the original, visit http://econtheory.org/] This paper examines a dynamic general equilibrium model with supply friction. With or without friction, the competitive equilibrium is efficient. Without friction, the market price is completely determined by the marginal production cost. If friction is present, no matter how small, then the market price fluctuates between zero and the "choke-up" price, without any tendency to converge to the marginal production cost, exhibiting considerable volatility. The distribution of the gains from trading in an efficient allocation may be skewed in favor of the supplier, although every player in the market is a price taker