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

December 2015

Economic Analysis and Policy 2015

Vincent Rious, Vice President Regulation at Microeconomix, Fabien Roques and Yannick Perez co-authored a paper wondering which electricity market design could encourage the development of demand response in Economic analysis and Policy.

Demand response is indeed a cornerstone problem in electricity markets under climate change constraints. 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 models are considered for demand response, from a development under a regulated regime to a development under competitive perspectives.

In this paper focusing on demand response and smart metering for mid-size and small consumers, we investigate which types of market signals should be sent to demand managers to see demand response emerge as a competitive activity. Using data from the French power system over nine years, we compare the possible market design options which would enable the development of demand response.

Our simulations demonstrate that under the current market rules demand response is not a profitable activity in the French electricity industry. Introducing a capacity market could bring additional revenues to demand response providers and improve incentives to put in place demand response programs in a market environment.

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