DESIGNING RULE FOR THE CRITICAL PEAK PRICING PARAMETERS CONSIDERING PRICE-RESPONSIVENESS OF CUSTOMERS

Abstract

Recent introduction of deregulation in the power industries offers electricity retailers the chance to make profit through electricity retail business. Accordingly, the retailers need to establish proper strategies for designing and implementing their pricing schemes to grab the chance. Many other pricing schemes can be used for the purposes, however, critical peak pricing (CPP) is chosen in this thesis as a tool for the profit maximization for the following reasons. One, to our knowledge, it is less highlighted compared to other retail pricing schemes despite of its advantages. The other, it contains several designable components for the retailer perspective, for example, base and peak rates, number of events, and event duration. In terms of the profit maximization, this thesis aims at presenting several analyses and intuitive guides for designing CPP scheme based on the price responsiveness of customers. The guides and designs include selection of the CPP parameters such as peak rate, number of events, and event duration. To achieve the goals, we first investigated how these parameters affect profit of the retailers. In this process, simple price-response model is adopted for the analyses. The results of the analyses allow us to provide the following three important guidelines. First, the optimal peak rate is approximately inversely proportional to price responsiveness of customers. Second, the optimal peak rate does not change a lot as the number of events varies. Third, the optimal peak rate for single critical event case can be safely used even in case of the multi-events situations in terms of the profit. Fourth, we can ensure existence of a minimum number of events not to lose profit compared the uniform pricing or real-time pricing schemes. Finally, it is a reasonable choice to set event duration as an hour and number of the events as equal time period to total events hour, instead of evaluating each combination of two variables. They are verified by the illustrative examples. In addition to examining the profit maximization of the retailers, we also explored the benefits that a CPP scheme would afford customers. The results showed that CPP could be advantageous to both customers and the retailer if the customers were sufficiently responsive to price fluctuations. It should be emphasized that such a win-win situation may be only achieved if the CPP scheme is properly designed

this, in turn, requires an analysis of the effects of the CPP parameters on profit and a methodology for selecting appropriate parameter values, which were presented in this thesis. On the other hands, we pointed out that CPP is not free from the payback phenomenon: a rise in consumption after a critical event, like other time-varying retail pricing schemes. Also, we showed that this payback has a negative effect on profits and thus must be appropriately considered when designing a CPP scheme by the illustrative example which proves that CPP scheme which is designed without considering payback may not be an optimal anymore if the payback takes place. However, few studies have examined CPP scheme design considering payback. This thesis thus characterizes payback using three parameters (duration, amount, and pattern) and examines payback effects on the optimal schedule of critical events and on the optimal peak rate for two specific payback patterns. All the analysis is verified through numerical simulations. The results demonstrate the need to properly consider payback parameters when designing a profit-maximizing CPP scheme.