Irrational Agents and the Power Grid

Abstract

For decades power systems academics have proclaimed the need for real time prices to create a more efficient grid. The rationale is economics 101: proper price signals will lead to an efficient outcome. In this talk we argue that competitive equilibrium theory does support the real-time price paradigm, provided we impose a particular model of rationality. However that this standard model of consumer utility does not match reality: the products of interest to the various “agents” are complex functions of time. The product of interest to a typical consumer is only loosely related to electric power — the quantity associated with price signals.  There is good news: an efficient outcome is easy to describe, and we have the control technology to achieve it. We need supporting market designs that respect dynamics and the enormous fixed costs that are inherent in power systems engineering, recognizing that we need incentives on many time-scales. Most likely the needed economic theory will be based on an emerging theory of efficient and robust contract design.