The Effect of Customer Participation in Electricity Markets: An Experimental Analysis of Alternative Market Structures

An experimental structure is demonstrated that represents end-use customers in electricity markets who can substitute part of their usage between day and night. Individuals' demand relationships are represented by a two-step value function for each period that are disaggregated from observed market demand relationships. Demand varies between day and night and during heat waves. Three alternative demandside market structures are evaluated:

1. customers pay the same fixed price (FP) in all periods - the base case,
2. a demand response feature (DRP) is added in periods of supply shortages, wherein buyers receive a prespecified credit for reduced purchases, and
3. a real time pricing (RTP) case where prices are forecast for the upcoming day/night pair, then buyers select their quantity purchases sequentially and are charged the actual marketclearing prices.

Initial experiments were conducted with active demand-participants, but with a predetermined typical "hockey-stick" supply structure that was varied randomly, over eleven day-night pairs that included heat wave and supply shortages. The RTP structure resulted in the greatest market efficiency, despite the more difficult cognitive problem it poses for buyers. Furthermore, a preference poll comparing DRP and RTP was conducted after each trial; and while 64% of the participants said they preferred DRP before RTP experiments, 76% selected the RTP structure afterwards, a statistically significant reversal of preferences.