The effect of the programs for demand response incentives in competitive electricity markets

The special features of electricity such as non-storability and lack of good substitutes, the network related market power and the demand inelasticity result in high volatile electricity prices in pool markets, especially during peak hours. Demand response (DR) programs with the aid of distributed energy resources (DER) provide the means to increase demand elasticity and, as a consequence, to counteract the effect of market power. This paper aims to assess the effectiveness of DR programs and try to answer to what extend DR programs will increase the demand elasticity and to what degree it will reduce the market power. Two DR programs, that is, time of use (TOU) rate and economic load response program (ELRP) are considered in this paper and the possible price responsiveness of load is modeled as linearly correlated to the difference of day and night TOU rate and the compensation price of load curtailment in order to determine the demand elasticity frontier. Game theory is employed to model the strategic bidding of generation companies (GenCos) and the Lerner index is used to quantify the market power. The proposed model is applied in Italian electricity market for numerical study. Copyright © 2008 John Wiley & Sons, Ltd.