A linear programming model for real-time pricing of electric power service

Real-time pricing (RTP) is an electric power service offering in which prices vary over time, based on projected supply and demand conditions. Prices may vary hourly or in larger time blocks and are typically announced several hours to one day in advance. RTP is an attractive option because it approximates the economic efficiency of spot pricing, while allowing customers time to react to prices. Currently, most RTP programs are experimental and price is set at approximately marginal cost. This approach does not consider how customers respond to the prices, as well as how their responses impact system costs and capacity requirements. As RTP begin to constitute a more significant share of the utility’s load, this ‘open loop’ price calculation is no longer appropriate. This paper develops a comprehensive model for RTP that balances supply and demand under various operating scenarios, while addressing utility capacity commitment decisions and customer subscription decisions. The methodology can be used to determine real-time prices that minimize the sum of supply costs and customer curtailment costs, both in a short-run operational mode and in a longer run planning mode.