Investment incentives for flexible demand options under different market designs

Abstract

This paper analyzes investment incentives for flexible manufacturing facilities under different market designs. We propose a multi-stage equilibrium model incorporating endogenous determination of generation capacity investment, network expansion and redispatch based on the model introduced by Grimm et al. (2016), including flexibilization of industrial electricity consumption. The model allows to investigate incentives for flexibilization and the impact of flexible industrial electricity consumers on the system. An application to the German electricity market reveals that flexible industrial electricity consumption can be profitable for firms. If the share of flexible electricity consumers is high, price fluctuations are mitigated, which lowers the individual cost savings from demand flexibility. Comparing different market designs, positive impacts of flexible electricity demand on the system are observed in both the system optimum and the market equilibrium. In scenarios with flexible industrial electricity consumption, welfare is considerably higher than in those without. This is due to lower electricity costs of industrial consumers, but more importantly due to less investment in conventional power generation as well as a reduced transmission network expansion. However, a comparison of nodal and uniform pricing underlines the importance of regional price signals with respect to an efficient allocation of flexible industrial demand.