Time-of-use pricing of electricity in monopoly and oligopoly

Abstract

This paper discusses the efficiency gains for time-of-use pricing over flat-rate pricing in the electricity sector. The electricity market may be characterised by a monopoly in some cases, where a single firm continues to enjoy market power, or an oligopoly, where two or more firms compete against one another by strategic interaction. This study establishes the feasibility condition for efficiency gains to arise from time-of-use pricing in a monopolistic set up using constrained optimization. In an oligopolistic set-up, the strategic interaction between producers depends on the level of demand. In case of high demand, the producers compete on the basis of output they will produce, resulting in a Cournot-type competition. On the other hand, in case of low demand, an oligopolistic structure may break with only the most efficient firm operating, or results in the emergence of leader firms and follower firms, i.e. the Stackleberg model of oligopoly. The strategic behaviour of firms in a duopoly, generalizable to n firms, is modelled in this study using constrained optimization.