Demand response and market performance in power economics

Abstract

This paper discusses the demand side impact on electricity market. The demand reduction of common commodities usually leads to reduced price, and in response to the high price, demand side management may be a good price mitigation mechanism for most commodities. However, in the electricity market, electricity demand has complicated interactions with the electric network, and the demand at different locations may have totally differing impact in different locations. Through a simple meshed network model, we show a counter-intuitive example: reduced demand leads to higher price. The global and local impacts of demand response are discussed, and market performance is studied by analyzing consumer surplus, supply surplus, and congestion rent. Market gaming analysis is conducted for demand under a variety of scenarios. Strategic players may benefit from the reduced demand at the strategic locations, and higher consumer price may be driven because of the loop flow effect for the electricity network. We also show that the impact of the demand depends on the congestion location in the system: demand response may increase or decrease economic benefit, and the benefit may be magnified or shrink in other part of the electricity market through the interaction of the network.