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Which electricity market design to encourage the development of demand response?

February 2012

EUI Working paper 2012/12

Co-authors: Fabien Roques and Yannick Perez.

Most liberalized electricity markets have a poor track record at encouraging the deployment of smart meters and the development of demand response. In Europe, different regulatory models are considered, ranging from a regulated business to as A competitive model.

In this paper we focus on demand response and smart metering for mid-size and small consumers and we investigate which types of market signals should be sent to demand manager to see demand response emerge as a competitive business. Using data from the French power system over the last 8 years, we compare the possible market design solutions to allow demand response to develop.

Our simulations demonstrate  that with the current market arrangements, demand response is not profitable. Introducing a capacity remuneration could bring additional revenues to demand response providers and increase incentives to put in place demand response programs.

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