An analytical approach to activating demand elasticity with a demand response mechanism

Authors

Cédric Clastres, Haikel Khalfallah

Abstract

The aim of this work is to demonstrate analytically the conditions under which activating the elasticity of consumer
demand could benefit social welfare. We have developed an analytical equilibrium model to quantify
the effect of deploying demand response on social welfare and energy trade. The novelty of this research is
that it demonstrates the existence of an optimal area for the price signal inwhich demand response enhances social
welfare. This optimal area is negatively correlated to the degree of competitiveness of generation technologies
and the market size of the system. In particular, it should be noted that the value of unserved energy or
energy reductionwhich the producers could lose from such a demand response schemewould limit its effectiveness.
This constraint is even greater if energy trade between countries is limited. Finally, we have demonstrated
scope for more aggressive demand response, when only considering the impact in terms of consumer surplus

Energy Economics 52 (2015)