The demand-side flexibility in liberalised power market: a review of current market design and objectives

Clément Cabot () and Villavicencio Manuel
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Clément Cabot: CEDP i3 - Centre d'Economie et de Décision Publique i3 (anciennement CERNA i3) - Mines Paris - PSL (École nationale supérieure des mines de Paris) - PSL - Université Paris Sciences et Lettres - I3 - Institut interdisciplinaire de l’innovation - CNRS - Centre National de la Recherche Scientifique
Villavicencio Manuel: Deloitte Economic Advisory, LEDA-CGEMP - Centre de Géopolitique de l’Energie et des Matières Premières - LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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Abstract: The recent energy crisis in Europe has brought the current electricity market design under scrutiny, highlighting the need for additional liquidity in forward markets, greater flexibility to mitigate peak prices and additional instruments to hedge consumer better again price risks. However, there is no consensus to date on the market design allowing the integration of demand as a source of flexibility, despite its critical role in complementing supply-side investments. This research presents a comparative analysis of current DR integration in different electricity markets, namely France, Germany, and Pennsylvania- New Jersey-Maryland (PJM) Interconnection in the US. The aim is to assess current trends, key differences, and the role of DR during recent power crises in Europe. The ongoing transformation of power systems calls for more active involvement of demand, necessitating improvements in existing tariffs and market design. This ranges from revising network tariff structure to ensure better incentives and fairness for prosumers and passive customers to introducing dynamic pricing schemes, which align consumer prices with wholesale market outcomes. However, despite efforts to facilitate consumer participation in different electricity markets, none of the existing DR schemes has achieved significant success. Moreover, the effectiveness of demand reduction during contingency events remains uncertain, raising questions about the level of reliability that can be achieved. However, DR also demonstrated its ability to fit in the existing wholesale market, notably during the 2021-2023 energy crisis in France, where its participation in the supply and demand equilibrium was demonstrated. While the market design that will emerge and the price signals used to coordinate decisions between customers, aggregators, and retailers remain unclear, there is a need for a more coordinated and robust approach toward integrating demand-side flexibility into electricity markets to achieve optimal outcomes for consumers and the grid.

Date: 2026-10-26
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Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-05839341

DOI: 10.23646/tyjr-sv40

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