Welfare redistribution through flexibility - Who pays?

Polina Emelianova () and Nils Namockel
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Polina Emelianova: Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI)
Nils Namockel: Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI)

No 2024-9, EWI Working Papers from Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI)

Abstract: As part of the German energy transition, the increasing adoption of electricity-driven technologies in enduse sectors has become a key political priority. Decentralized flexibility from assets such as electric vehicles and heat pumps influences electricity price formation, raising new challenges related to the redistribution of welfare gains, not only between producers and consumers but also across different groups within these two categories. This paper addresses two research questions: How does decentralized flexibility affect the redistribution of total system welfare between producers and consumers in the wholesale electricity market? And how do varying degrees of flexibility impact electricity costs across different user groups in the transport and heating sectors? To explore these questions, we enhance a European high-resolution dispatch model, focusing specifically on Germany, and incorporate a range of flexibility options and heterogeneous end-user groups. We further simulate multiple use cases with varying degrees of flexibility in the road transport and heating sectors. Our findings reveal that while total system welfare improves slightly, increased flexibility redistributes welfare from producers to consumers. This redistribution benefits consumers as an aggregated group by reducing electricity procurement costs, regardless of whether they provide flexibility. Among the flexibility options analyzed, electric vehicles - particularly through bidirectional charging - demonstrates a greater potential for welfare gains compared to heat pumps. However, this dynamic intensifies competition with centralized assets like utility-scale batteries. In the transport sector, flexibility leads to notable variations in electricity costs based on charging behaviors, whereas in the heating sector, increased flexibility promotes cost convergence across different user groups.

Keywords: Flexibility; Welfare Effects; Energy System Modeling; Energy Transition; End-use Sectors (search for similar items in EconPapers)
JEL-codes: C61 D47 O33 Q41 Q48 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2024-11-25
New Economics Papers: this item is included in nep-ene, nep-reg and nep-tre
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Persistent link: https://EconPapers.repec.org/RePEc:ris:ewikln:2024_009

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