| I think electricity use is far more elastic than you're imagining. Plenty of big users can turn up/down production and already do so based on prices. If wide price swings got more frequent, more stuff would get dynamic. You can imagine home appliances having an 'eco' setting which runs the appliance like the washing or the dishwasher at the cheapest time in the next 12 hours. Or the water heating systems which heat more water when prices are cheap. Or heaters which switch between natural gas and heat pump based on price. Or electric car chargers which charge during the cheapest hours. (all of these already exist, but none are yet common). Over the long term there is also plenty of elasticity. If electric heating is expensive, people will install gas/oil heaters when they renovate. If electricity is cheap, more people buy electric cars. With cheap electricity, maybe fewer people decide to add more insulation to their houses. Businesses don't upgrade energy inefficient equipment to be more energy efficient, etc. Plenty of demand elasticity in both the short and long term. End result: As long as the market is unconstrained, prices won't hit zero more than say ~5% of the time. |
If peak to trough is a large gap, say 60% of peak, this tends to make it less likely that peak will be met by overproduction, since that would involve very large capital costs.
The picture you paint above would suggest a very small gap between peak and trough, say 2% of peak. This means that almost certainly there would be enough over capacity to more than meet peak demand. Therefore the total daily demand would be more than met by capacity, leading to some energy being thrown away. So at all times except the peak, the marginal cost would be zero.
You have given an accurate argument for why demand would be elastic at trough. But you haven't given any reason why overall demand would be very elastic.