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Impacts of market power in the day-ahead electricity market on incentive-based demand response

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 study demonstrates how market power in the day-ahead electricity market influences the balancing cost in incentive-based demand response (DR) programs. The marginal cost of DR in an incentive-based DR program corresponds to the marginal benefit of energy services that might be provided under baseline electricity consumption. We analyze a stylized Cournot oligopoly model and demonstrate that distortion of an imperfectly competitive day-ahead market generates additional social cost (welfare loss) in the balancing period by increasing the cost of DR. We further investigate the case where some firms in the day-ahead market can also benefit from power generation in the balancing period and demonstrate that the strategic behavior of these firms further decreases total supply in an imperfectly competitive day- ahead market. The results indicate that procompetitive policies in the day-ahead market will lower the cost of DR, which makes demand more flexible and yields additional welfare gains, thereby lowering the balancing cost during the balancing period.

Keywords: Incentive-based demand response; Market power; Day-ahead electricity market; Demand-side flexibility (search for similar items in EconPapers)
JEL-codes: L13 Q41 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2023-12
New Economics Papers: this item is included in nep-com, nep-ene, nep-ind and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:was:dpaper:2303

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