1 Market Multiplier. 2 Comments Does the price effect of demand exist? Why include when CA is working hard to establish resource adequacy? Price elasticity.

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Presentation transcript:

1 Market Multiplier

2 Comments Does the price effect of demand exist? Why include when CA is working hard to establish resource adequacy? Price elasticity of demand only affects income distribution

3 Market Price Multiplier Effect of a demand reduction on market price DSM shifts demand curve to the left Implies lower prices given fixed supply curve During periods of surplus this effect is small Inclusion allocates price benefit to energy efficiency programs (consumer surplus)

4 Effect of a Demand Reduction on Market Price Price ($/MWH) Demand (MWH) 0 Supply High demand w/o DSM High demand w/ DSM Large price drop Small price drop Low demand w/o DSM Low demand w/ DSM Theory

5 Prior Multiplier Values and Sources SourceOn-peak (12:00-18:00, working weekdays) Off-peak (other hours) ALJs 10/25/00 Ruling 4.0X for X for X for X for all years CALMAC 2000 report 5.0X market power present 2.5X market power absent Not available E3s 2001 report4.1X1.8X

6 Market Elasticity Estimates On-Peak: 8 am to 6 pm, Working Weekdays, May to October Off-Peak: All Other Hours RNS = Residual net short, as % of retail sales, transacted at market Multiplier Trended to 1.0 in Resource Balance Year Market Multiplier (On Peak RNS = 5%)

7 Recommendations: Price effect of demand. Does the price effect of demand exist? The price effect of demand has been estimated in numerous forums, based on historical hourly price data. The effect in the Draft Report is much smaller than prior applications because E3 only applies it to RNS. Why include when CA is working hard to establish resource adequacy? As CA gains resource adequacy, the relevant portion of the supply curve would be mildly upward sloping, and the effect would be lessened – but that does not merit its exclusion.

8 Recommendation: Income Distribution Price elasticity of demand only affects income distribution AB970 requires that the avoided cost include the system value or reduced load on reducing market clearing prices and volatility. The question is whether system value is: Consumer focused (consumer surplus), or Joint consumer and producer focused Past use of the multiplier has focused on consumer surplus, hence E3s recommendation to continue the inclusion of the price elasticity of demand multiplier.