This study investigates the effects of dynamic-price retail contracting on end-to-end power system operations. Performance is evaluated by means of carefully defined metrics for system stability, market efficiency, and market participant welfare. The study is carried out for an Integrated Retail and Wholesale (IRW) Test Case for which households have smart (price-responsive) air-conditioning (A/C) systems. A simplified version of the IRW Test Case with a directly postulated linear household demand curve is first used to derive, analytically, a set of necessary and sufficient conditions for system stability under dynamic-price retail contracting. A key finding is that dynamicprice retail contracts induce braided cobweb dynamics consisting of two interwoven cycles for power and price outcomes that can exhibit point convergence, limit-cycle convergence, or divergence depending on a small set of structural parameters. Outcomes are then reported for a dynamic welfare sensitivity study undertaken using the full IRW Test Case with smart household A/C systems. One surprising finding is that dynamic-price retail contracts with a positive price mark-up result in worse welfare outcomes for generators and household residents than flat-rate retail contracts for treatments exhibiting convergent cobweb dynamics.
Thomas, Auswin George and Tesfatsion, Leigh, "Braided Cobwebs: Cautionary Tales for Dynamic Retail Pricing in End-to-End Power Systems" (2017). Economics Working Papers. 17028.