The price signal paradigm – On the evolution and limitations of demand-side flexibility in the EU

Abstract

Demand-side flexibility (DSF) generally refers to adjusting electricity demand to better match supply and capacity in the grid. Widely seen as a central pillar of the energy transition, it is anticipated to play a key role in decarbonization. Despite its recent popularity, its efficacy as a policy instrument remains limited. This paper argues that DSF is being hindered by an overreliance on what is seen as its primary lever – the price signal. The price signal “paradigm” refers to how the general problem of fostering a more flexible demand side has been constrained to the narrow task of having users respond to price signals. The consequence of this development has been for policymakers and system operators to limit themselves to the role of information providers and neutral market facilitators, absolving themselves of more direct obligations and shifting the bulk of the responsibility onto end users who are required to actively participate in the electricity market. This paper explores the emergence of this paradigm, shedding light on the historical factors that have shaped the evolution of DSF, and the limitations inherent to its contemporary form. It outlines policy recommendations and an alternative approach that centers on shifting more responsibility towards system operators.