Technical Support Document
For EPA's Multi-Pollutant Analysis
Electricity Demand Response to Changes in Price in EPA's Power
Sector Model
October 2005
Prepared by:
Office of Air and Radiation
U.S. Environmental Protection Agency
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The EPA has conducted a comprehensive analysis of various multi-pollutant
proposals that have been introduced in the Senate. The proposals are designed to reduce
emissions from the power sector, and EPA has agreed to perform detailed modeling for
five legislative proposals and to present that information along with modeling results of
EPA's recent regulatory approach to reducing emissions from the power sector. The
analysis is based on air quality, health benefits, and power sector modeling projections
and estimates for each proposal for the years 2010, 2015, and 2020. The following
proposals and regulations were analyzed:
1. The Clean Power Act (Jeffords, S.150 in 109th)
2. The Clean Air Planning Act (Carper, S.843 in 108th)
3. The Clear Skies Act of 2005 (Inhofe, S. 131 in 109th)
4. The Clear Skies Act of 2003 (Inhofe, S.485 in 108th)
5. The Clear Skies Act of 2005 (Manager's Mark of S. 131 in 108th)
6. The Clean Air Interstate Rule, The Clear Air Mercury Rule, and The Clean
Air Visibility Rule (EPA promulgated rules, 2005)
This technical support document reports the method used for developing EPA's
'demand response' sensitivities as part of the multi-pollutant analysis. Various
sensitivities were conducted to the power sector modeling to better understand the
impacts of the various proposals that were analyzed. One such sensitivity was the impact
of increased electricity prices on demand, commonly referred to as 'demand response.'
The power sector model that EPA uses for both regulatory and legislative analytical
support is the Integrated Planning Model (IPM), a dynamic linear programming model
that can be used to examine air pollution control policies for sulfur dioxides (SO2),
nitrogen oxides (NOx), mercury, and carbon dioxide (C02) throughout the contiguous
U.S. for the entire power system. Documentation for IPM can be found at
www.epa.gov/airmarkets/epa-ipm.
In general, 'demand response' refers to the change in the quantity demanded by
consumers in response to pricing signals. For example, as a price of a good rises,
demand for that good will decrease as consumers use substitutes and/or curtail their
consumption of that good. The magnitude of this change in quantity demanded is
represented by the coefficient of price elasticity of demand. For example, a price
elasticity of demand of 0.15 indicates that an increase in price of one percent will result
in a 0.15 percent reduction in quantity demanded. In the electricity markets, such a
change in quantity demanded in response to increasing electricity price is referred to as
electricity load reduction. Electricity prices could increase due to changes in factors such
as increases in fuel prices and the changes in compliances costs for meeting various
environmental requirements. EPA's power sector model, the Integrated Planning Model
(IPM), can incorporate such load reduction endogenously through an assumed price
elasticity of demand. Since less electricity is demanded during times of high prices and
less is produced, the result is a lower total system cost of electricity production than
would otherwise be the case.
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After surveying several studies on explicit and implicit1 estimates of the price
elasticity of demand for the power sector, EPA developed the price elasticity based on the
average of the implied elasticities that were estimated based on the electricity sales and
retail price data in the EIA May 2004 study (Analysis of S. 1844, the Clear Skies Act of
2003; S. 843, the Clean Air Planning Act of2003; and S. 366, the Clean Power Act of
2003). The elasticity estimates used in this analysis are listed in the following table:
Elasticity Estimates
(Retail Price Elasticities of Demand)
Year
Elasticity
2010
0.16
20152
0.20
2020
0.25
The elasticity estimates in the above table were applied in IPM at a wholesale
market level based on the Energy Information Administration's 'Annual Energy Outlook
2004' electricity price data at the generation, transmission, and distribution component
level. Since all electricity prices within IPM are at a wholesale market level, EIA's retail
elasticity estimates were then appropriately scaled for use in IPM to represent wholesale
prices. The results of the demand response sensitivities can be found in Section #6 of the
various multi-pollutant analyses ('Additional Analyses of Key Provisions and Modeling
Assumptions').
The demand response function is incorporated into IPM in two steps. In the first
step, the energy demanded at a certain price is estimated based on the assumed elasticity
estimates in the above table at the region level and for each season in the model. In the
second step, the peak load (demand), after accounting for the change in energy demanded
in the first step, is calculated at the IPM region level by applying the implied load factor
from the Base Case demand and peak load projections. These two adjustments in the
model result in an adjusted demand level, dependant upon the change in electricity price,
for a particular modeling scenario.
1 Implicit elasticities are calculated by observing the changes in quantity demanded with respect to a given change in
price.
2 Elasticity estimate for 2015 were linearly interpolated.
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