Impact of Demand-side Energy Efficiency on the Electricity Balancing Market and Environmental Policy

Yukihide Kurakawa and Makoto Tanaka
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Yukihide Kurakawa: Kanazawa Seiryo University.

RIEEM Discussion Paper Series from Research Institute for Environmental Economics and Management, Waseda University

Abstract: This paper shows how demand-side energy use efficiency affects demand response (DR) and total CO2 emissions. The marginal cost of DR corresponds to the marginal utility of electricity consumption. Thus, improved energy efficiency increases the marginal cost of DR and increases thermal power generation in balancing markets. We analyze a model consisting of a day-ahead and balancing market and examine CO2 emissions from each market. Improved energy efficiency decreases emissions from the day-ahead market while increasing emissions from the balancing market. The analysis reveals that improved energy efficiency could increase total emissions when the emission factor of the marginal plant in the day-ahead market is sufficiently small. Raising the carbon tax rate as energy efficiency improves will be necessary to deter such perverse effects, expanding the use of DR in the balancing market.

Keywords: Day-ahead Market; Balancing Market; Carbon Tax; Incentivebased Demand Response; Demand-side Energy Efficiency (search for similar items in EconPapers)
JEL-codes: D02 Q41 Q58 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2025-04
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:was:dpaper:2501

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