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

Cédric Clastres and Haikel Khalfallah

Energy Economics, 2015, vol. 52, issue PA, 195-206

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 in which 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 reduction which the producers could lose from such a demand response scheme would 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.

Keywords: Demand response; Price signals; Welfare analysis (search for similar items in EconPapers)
JEL-codes: C61 L11 Q41 (search for similar items in EconPapers)
Date: 2015
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Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

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