Contracts with Aftermarket Substitution: The Case of PG&E and Electric Batteries

Abstract

Electric batteries are rapidly growing technologies that allow storing electricity at one time to be used in another. In recent years, many battery companies have entered the market for end-user batteries. These behind-the-meter batteries allow end-users (e.g. households) to store electricity at off-peak prices for use in peak price periods in order to reduce their bills. They also allow arbitrage on retailer's temporal electricity prices. Electricity retailers facing increased use of batteries by end-users should respond by updating their offered prices. By finding the new optimal prices, the retailers would like to understand the impact of end-user battery technology on their surplus. In this paper, we focus on electricity retailer's optimal electricity pricing considering incentives when batteries are available to the end-users, and study the impact of these batteries on retailer's welfare. We consider an economy consisting of an electricity retailer, and heterogeneous end-users. The retailer buys electricity in the wholesale market and offers contracts to end-users, while the end-users can access behind-the-meter batteries via battery companies. To isolate the impact of batteries, we do not consider access to rooftop solar as alternative source of electricity in this study; in other words, the retailer is a monopolist.