Industrial Demand Response: How Network Tariffs and Regulation Do (Not) Impact Flexibility Provision in Electricity Markets and Reserves

Jörn C. Richstein and Seyed Saeed Hosseinioun

No 1853, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: Incentives for industrial loads to provide demand response on day-ahead and reserve markets are affected both by network tariffs, as well as regulations on the provision of flexibility in different markets. This paper uses a numerical model of the chlor-alkali process with a storable intermediate good to investigate how these factors affect the provision of demand response in these markets. We also model the effect of network tariffs and regulation on endogenous investment into process excess capacities, which are needed to provide load shifting. We find that fixed network tariffs based on peak-demand (demand charges) can be detrimental to the provision of demand response, especially to new investments in process capacity. For existing excess capacities, only high network tariffs inhibit demand response by limiting the optimal peak load below its physical limit. Marketing flexibility on the day-ahead market and in the reserves are substitutes for each other. The choice where to market flexibility is affected both by fixed peak-demand network tariffs and existing excess capacities. For endogenous investments, there are synergies between primary reserve participation and day-ahead flexibility provision, with the combination leading to increased capacity investments. In contrast, so-called interruptible load reserves, regular payments to industrial loads to be able to reduce electricity consumption at any point in time, incentivize a flat demand level. Consequently, such reserve markets reduce investments into additional flexibility capacities and often crowd out active participation in other markets.

Keywords: demand response; optimization; day-ahead market; reserves; network tariffs; chemical production (search for similar items in EconPapers)
JEL-codes: C61 L65 Q40 Q48 (search for similar items in EconPapers)
Pages: 23 p.
Date: 2020
New Economics Papers: this item is included in nep-ene and nep-reg
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Citations: View citations in EconPapers (16)

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