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Demand response in adjustment markets for electricity

Claude Crampes () and Thomas-Olivier Léautier
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Thomas-Olivier Léautier: CRM - Centre de Recherche en Management - IAE - Institut d'Administration des Entreprises - Toulouse - CNRS - Centre National de la Recherche Scientifique - UT1 - Université Toulouse 1 Capitole

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Abstract: This article examines the participation of consumers in adjustment markets for electricity power. These markets allow market participants to respond to random supply shocks occurring after quantities have been contracted. Under perfect competition, opening the adjustment market to consumers always increase ex post efficiency, hence welfare, as expected. However, this result is not robust to strategic behavior by consumers who hold private information on their value for electricity power. We prove that under such information asymmetry, allowing consumers to enter the adjustment market may reduce welfare. This arises because suppliers limit the information rents they must abandon by proposing inefficient ex ante retail contracts. If the value of ex post efficiency gains due to consumers' participation is low, whereas the information distortion is high, the overall net effect is a welfare decrease.

Keywords: electricity consumption; adjustment market; demand response; information asymmetry (search for similar items in EconPapers)
Date: 2015
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Published in Journal of Regulatory Economics, Springer Verlag, 2015, 48 (2), pp.169 - 193. ⟨10.1007/s11149-015-9284-0⟩

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DOI: 10.1007/s11149-015-9284-0

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