Braided Cobwebs: Cautionary Tales for Dynamic Pricing in Retail Electric Power Markets

This study investigates the effects of dynamic-price retail contracting on integrated retail and wholesale (IRW) power market operations. Performance is evaluated by means of carefully defined metrics for system stability and market participant welfare. The study is carried out for an IRW Test Case for which 500 households have price-responsive air-conditioning systems. It is shown that dynamic-price retail contracting can give rise to braided cobweb dynamics consisting of two interwoven cycles for power and price levels exhibiting either stability or instability depending on system conditions. Moreover, even in stable cases, dynamic-price retail contracts generally result in worse welfare outcomes for households than flat-rate retail contracts.