NERA Study Demonstrates Effectiveness of Availability Payments in Balancing Electricity Supply and Demand through Demand Response

28 October 2013

New York -- NERA Economic Consulting, a leading global provider of economic advice and analysis in business, legal, and regulatory matters, has released a new study on the value of availability payments to consumers in the electric power industry.

Effective Use of Demand Side Resources: The Continued Need for Availability Payments, produced by a NERA team led by Vice President Jonathan Falk, defines availability payments as promises of direct or in-kind payments to electricity customers in return for reductions in electricity demand when requested, otherwise known as demand response.

"Advocates of dynamic pricing -- in which customers pay electricity prices that reflect the hour-to-hour marginal economic cost of producing power -- have made availability payments somewhat controversial, even though they are successfully used in many electricity markets," said Mr. Falk. "Our study clearly demonstrates that availability payments are an effective demand-side tool for keeping electricity supply and demand in balance, and will continue to be so even if dynamic pricing were to become widespread."

NERA's study finds support for availability pricing in three ways. First, the findings of behavioral economics demonstrate that mechanisms like availability payments make it much easier to overcome consumers' cognitive biases against voluntary power demand reductions (even if those reductions are in their best interest). Second, there is a clear analogy between availability payments and capacity markets for competitive generators.

Finally, empirical results support the need for availability payments.  These empirical findings include both direct support for the behavioral theory in the economics literature and support from a NERA-created database of participation rates for over 900 programs in the US. Analysis of the programs showed that those utilizing availability payments have much higher participation rates than those that depend on consumers deciding on their own moment-by-moment when to cut back electricity usage.

The full study is available here.

About NERA

NERA Economic Consulting (www.nera.com) is a global firm of experts dedicated to applying economic, finance, and quantitative principles to complex business and legal challenges. For over half a century, NERA's economists have been creating strategies, studies, reports, expert testimony, and policy recommendations for government authorities and the world's leading law firms and corporations. We bring academic rigor, objectivity, and real world industry experience to bear on issues arising from competition, regulation, public policy, strategy, finance, and litigation.

NERA's clients value our ability to apply and communicate state-of-the-art approaches clearly and convincingly, our commitment to deliver unbiased findings, and our reputation for quality and independence. Our clients rely on the integrity and skills of our unparalleled team of economists and other experts backed by the resources and reliability of one of the world's largest economic consultancies. With its main office in New York City, NERA serves clients from more than 25 offices across North America, Europe, and Asia Pacific.