OverviewWe study Peak-Time-Rebates (PTR) contracts in day-ahead electricity markets. Such contracts reward customers forreducing their consumption when wholesale prices are high. They are very popular among politicians andconsumers’ representatives because customers can only benefit from them, contrary to other instruments such asintroducing high on-peak prices.We first study the incentives PTR contracts provide to strategic consumers endowed with private information, andcharacterize the class of incentive compatible (IC) contracts. This exercise allows us to unify under a singleanalytical framework the various critics that have been formulated against PTR contracts.IC contracts do not guarantee consumers’ participation in PTR programs anymore. Consequently, we theninvestigate to which extent a high enrollment to IC PTR programs can be reached. We focus on two importantfeatures of the market environment: (1) whether electricity retail is handled by local monopolies or by (imperfectly)competitive retailers ; and (2) whether policy-makers decide to maintain the cross-subsidies embedded in thehistorical tariff.MethodsTheoretical paper: microeconomics, industrial organization, and (tools from) mechanism design.ResultsThe first part points out a structural flaw of PTR contracts: embedded arbitrage opportunities. Consumers areallowed to buy their baseline power (which they later resell) at a constant (state-independent) price while this poweris worth more by construction. Under asymmetric information, strategic consumers are thus incentivized to inflatetheir baseline. We show that if one were to make a PTR design IC, it would become equivalent to a variable Critical-Peak-Pricing (vCPP) design, in which customers have to purchase their peak consumption at the spot price.Under significant asymmetric information, the relevant economic issue is thus to design vCPP contracts optimally inorder to achieve high enrollment rates under voluntary opt-in. If cross-subsidies to non-switchers are not-maintainedand retail is perfectly competitive (or handled by a benevolent local monopoly), competitive screening (or abenevolent social planner) prevents any cross-subsidies to be sustainable: full-enrollment to Real-Time Pricing(RTP) ends up being the equilibrium outcome. If however the historical rate is frozen so as to protect non-switchingconsumers from an increase in their bills (i.e. if historical cross-subsidies are maintained), a second-best trade-offmust be found between between the benefits of increased allocative efficiency, and the costs of maintaining crosssubsidies(i.e. either the costs of public funds or the opportunity cost of a local monopoly budget balance constraint).A perfectly competitive retail industry fails to reach this second-best outcome.ConclusionsThis paper tries to make it clearer why vCPP and PTR contracts are not equivalent, contrary to what is often thoughtwithin the industry. From a public policy perspective, it casts some doubts on the relevance of encouraging PTRmarket designs in liberalized electricity markets instead of indirect ways to create a price-responsive demand, forexample by encouraging competitive screening.
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