Discussion Papers 2024

CIRJE-F-1226	"The Role of Advance Notice in Shaping Industrial Response to Time-Varying Electricity Prices"
Author Name	Isogawa, Daiya, Hiroshi Ohashi and Tokunari Anai
Date	April 2024
Full Paper	PDF file
Remarks

Abstract
Time-varying electricity prices is pivotal for efficient electricity demand management, particularly when supply is inflexible. Utilities often issue advance notices during peak demand periods to alert users of imminent price hikes. However, the extent to which such notices influence demand response (DR) effectiveness has been understudied, either theoretically or empirically. This paper investigates the impact of advance notifications periods on industrial responses to fluctuating electricity prices. It posits that for users with a lower rate of inter-temporal elasticity of substitution, DR efficacy wanes as advanced warnings of peak prices lead to more homogenized consumption patterns over time. Empirical evidence from an industrial DR program in Japan substantiates this theory. Furthermore, the paper explores the economic rationale behind utilities’ decisions to issue advance notices, despite their potential to lessen DR impact.
Keywords: Demand Response; Critical Peak Pricing; Advance Notice; Constant-elasticity of Substitution

Abstract

Time-varying electricity prices is pivotal for efficient electricity demand management, particularly when supply is inflexible. Utilities often issue advance notices during peak demand periods to alert users of imminent price hikes. However, the extent to which such notices influence demand response (DR) effectiveness has been understudied, either theoretically or empirically. This paper investigates the impact of advance notifications periods on industrial responses to fluctuating electricity prices. It posits that for users with a lower rate of inter-temporal elasticity of substitution, DR efficacy wanes as advanced warnings of peak prices lead to more homogenized consumption patterns over time. Empirical evidence from an industrial DR program in Japan substantiates this theory. Furthermore, the paper explores the economic rationale behind utilities’ decisions to issue advance notices, despite their potential to lessen DR impact.

Keywords: Demand Response; Critical Peak Pricing; Advance Notice; Constant-elasticity of Substitution