Flexibility now or later? – Impact of market timing on flexibility and social welfare of demand response

Abstract

Demand side management enables flexible electricity consumers to participate in system services that contribute to enhanced integration of renewable energy sources. The specific market timing, pricing scheme and demand response program decide in which way consumers receive and react to incentives. Aside from pricing, several other parameters were found to greatly influence consumer response. Policy makers can improve the market design of wholesale and balancing markets. This would be a necessary tool to increase the demand side flexibility, but could also be used to allow better forecasts of production. Here, the impact of lead time on the flexibility of consumers is investigated and its impact on social welfare is estimated. The price elasticity of consumers can vary in different ways depending on the lead time and estimations may be uncertain. Therefore, the concept of a demand flexibility gap is proposed in order to quantify how the uncertainty of consumers’ responses may affect the social welfare of such a policy change. We recommend that lead time should be considered in electricity market design, e.g., in consecutive ahead markets in order to tap the full potential of flexibility from the demand side.