Optimization of time-varying electricity rates

Jacob Mays*, Diego Klabjan

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

8 Scopus citations


Current consensus holds that 1) passing through wholesale electricity clearing prices to end-use consumers will produce maximal efficiency gains and 2) simpler forms of time-varying retail rates will capture only a small portion of potential benefits. We show that neither holds in the presence of capacity costs typical in U.S. wholesale markets. Using an optimization model describing the short-term problem faced by an electricity retailer, we find hourly prices that optimally pass through capacity costs. We estimate benefits for a retailer using these prices as well as optimal configurations of a number of time-varying rate structures. Testing a range of realistic assumptions, we find that in the absence of a well-designed demand charge, passing through clearing prices may miss up to three quarters of the benefits possible from optimal hourly prices. By contrast, a simpler critical peak pricing structure enables retailers to achieve approximately two-thirds of the total possible benefits.

Original languageEnglish (US)
Pages (from-to)67-91
Number of pages25
JournalEnergy Journal
Issue number5
StatePublished - 2017


  • Critical peak pricing
  • Rate design
  • Real-time pricing
  • Time-of-use rates

ASJC Scopus subject areas

  • Economics and Econometrics
  • Energy(all)

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