4. Real-Time Pricing; An Application to the Nordic Power Markets

In this chapter we study the potential effects of real-time pricing of electricity on; the need for total, peak, and mid-merit capacities; total demand; prices; peak demand hours; and economic welfare in the Nordic power markets. A characteristic of the Nordic power market is the large variety of production technologies, of which hydro and nuclear power are capacity constrained. We have also studied whether the results of real-time pricing (RTP) are sensitive to the simultaneous implementation of tradable emission permits. We find that RTP diminishes the need for total capacity even with inelastic demand. Our results show that even with modest assumptions related to RTP participation, the annual mid-merit and peaker capacity efficiency savings amount to 97 million Euros, which are around 6% of their total annual investment costs. The price of the peak demand hour clearly diminishes as the share of the RTP customers increases or demand becomes more price elastic. We compare RTP and tradable emission permits as two separate instruments in reaching energy use efficiencies and show how these two instruments must be seen as complementary and not as substitutable instruments. We find that welfare effects of the implementation of RTP are positive.