Death spiral, transmission charges, and prosumers in the electricity market

Abstract

The presence of prosumers with distributed renewable energy has been viewed as an effective way of enhancing the power sector’s resilience. The current transmission charge is designed mainly to recover lumpy transmission investments and other routine costs. Thus, a decline in the reliance on the bulk power market owing to an increase in consumers becoming prosumers shifts transmission costs to traditional consumers, a situation known as a “death spiral”. This study examines how the presence of prosumers affects the transmission charge and market outcomes by explicitly considering their optimization problem in the market. A prosumer is formulated either as a price-taker or as a strategic entity, and is assumed to make his/her own decision on the amounts of consumption, dispatchable energy to produce, and energy to sell into or buy from the bulk energy market, subject to non-dispatchable renewable output. We refute the common belief, demonstrating that the transmission charge does not necessarily increase with the proportion of prosumers in the market. The bulk power market could benefit from lower power prices owing to the prosumers’ renewable production with low marginal costs. Strategic prosumers may cause the transmission charge to increase because they reduce their procurement from the bulk energy market. Therefore, our analysis contributes to the recent debate on transmission costs in the presence of prosumers.