IDEAS home Printed from https://ideas.repec.org/a/gam/jeners/v13y2020i21p5672-d437179.html
   My bibliography  Save this article

The Clean Energy Package and Demand Response: Setting Correct Incentives

Author

Listed:
  • Bert Willems

    (TILEC, Department Economics, Tilburg University, 5037 AB Tilburg, The Netherlands
    Toulouse School of Economics, Toulouse University, 31000 Toulouse, France
    Center on Energy Regulation in Europe CERRE, B-1050 Brussels, Belgium)

  • Juulia Zhou

    (TILEC, Department of Law, Technology, Markets, and Society, Tilburg University, 5037 AB Tilburg, The Netherlands)

Abstract

We describe how recent EU regulation affects demand response (DR) and highlight some of the remaining regulatory challenges from a legal and economic viewpoint. With the Clean Energy Package (CEP), the EU has opted for a fully market-based, consumer-centered approach for DR. The development of business models and products is left to a large extent to market forces. However, to enable the efficient development of those DR markets, network regulation has to adapt. (1) Network tariffs have to become more cost-reflective to provide correct incentives to market participants. The capacity tariffs have to increase, net-metering should be abolished, and optional tariff components for providing flexibility may need to be considered. (2) The regulation for distribution system operators (DSOs) may need to be fine-tuned to reflect their new roles. We present three scenarios: (a) a horizontal merger of unbundled DSOs under incentive regulation, (b) a DSO as a subsidiary of an integrated utility under cost plus regulation, (c) a transfer of some activities from DSO to TSO.

Suggested Citation

  • Bert Willems & Juulia Zhou, 2020. "The Clean Energy Package and Demand Response: Setting Correct Incentives," Energies, MDPI, vol. 13(21), pages 1-19, October.
    • Handle: RePEc:gam:jeners:v:13:y:2020:i:21:p:5672-:d:437179
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/1996-1073/13/21/5672/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/1996-1073/13/21/5672/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Rious, Vincent & Perez, Yannick & Roques, Fabien, 2015. "Which electricity market design to encourage the development of demand response?," Economic Analysis and Policy, Elsevier, vol. 48(C), pages 128-138.
    2. Patteeuw, Dieter & Henze, Gregor P. & Helsen, Lieve, 2016. "Comparison of load shifting incentives for low-energy buildings with heat pumps to attain grid flexibility benefits," Applied Energy, Elsevier, vol. 167(C), pages 80-92.
    3. Weis, Allison & Jaramillo, Paulina & Michalek, Jeremy, 2014. "Estimating the potential of controlled plug-in hybrid electric vehicle charging to reduce operational and capacity expansion costs for electric power systems with high wind penetration," Applied Energy, Elsevier, vol. 115(C), pages 190-204.
    4. Dupont, B. & Dietrich, K. & De Jonghe, C. & Ramos, A. & Belmans, R., 2014. "Impact of residential demand response on power system operation: A Belgian case study," Applied Energy, Elsevier, vol. 122(C), pages 1-10.
    5. Roos, Aleksandra & Bolkesjø, Torjus Folsland, 2018. "Value of demand flexibility on spot and reserve electricity markets in future power system with increased shares of variable renewable energy," Energy, Elsevier, vol. 144(C), pages 207-217.
    6. Behrangrad, Mahdi, 2015. "A review of demand side management business models in the electricity market," Renewable and Sustainable Energy Reviews, Elsevier, vol. 47(C), pages 270-283.
    7. Michael G. Pollitt, 2019. "The European Single Market in Electricity: An Economic Assessment," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 55(1), pages 63-87, August.
    8. Kim, S. & Pollitt, M. & Jin, Y. & Yoon, Y., 2017. "Contractual Framework for the Devolution of System Balancing Responsibility from the Transmission System Operator to Distribution System Operators," Cambridge Working Papers in Economics 1738, Faculty of Economics, University of Cambridge.
    9. B. Willems & E. Ehlers, 2008. "Cross-Subsidies in the Electricity Sector," Competition and Regulation in Network Industries, Intersentia, vol. 9(3), pages 201-228, September.
    10. Hsu, Michael, 1997. "An introduction to the pricing of electric power transmission," Utilities Policy, Elsevier, vol. 6(3), pages 257-270, September.
    11. Jeanne‐Mey Sun & Jacques Pelkmans, 1995. "Regulatory Competition in the Single Market," Journal of Common Market Studies, Wiley Blackwell, vol. 33(1), pages 67-89, March.
    12. Ketterer, Janina C., 2014. "The impact of wind power generation on the electricity price in Germany," Energy Economics, Elsevier, vol. 44(C), pages 270-280.
    13. Koichiro Ito, 2014. "Do Consumers Respond to Marginal or Average Price? Evidence from Nonlinear Electricity Pricing," American Economic Review, American Economic Association, vol. 104(2), pages 537-563, February.
    14. Chi Kong Chyong, 2019. "European Natural Gas Markets: Taking Stock and Looking Forward," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 55(1), pages 89-109, August.
    15. Manuel Frondel and Gerhard Kussel, 2019. "Switching on Electricity Demand Response: Evidence for German Households," The Energy Journal, International Association for Energy Economics, vol. 0(Number 5).
    16. Michael G. Pollitt, 2018. "Electricity Network Charging in the Presence of Distributed Energy Resources: Principles, Problems and Solutions," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 1).
    17. Thomas-Olivier Léautier & Véronique Thelen, 2009. "Optimal expansion of the power transmission grid: why not?," Journal of Regulatory Economics, Springer, vol. 36(2), pages 127-153, October.
    18. Küfeoğlu, Sinan & Pollitt, Michael G., 2019. "The impact of PVs and EVs on domestic electricity network charges: A case study from Great Britain," Energy Policy, Elsevier, vol. 127(C), pages 412-424.
    19. Giulietti, Monica & Le Coq, Chloé & Willems, Bert & Anaya, Karim, 2019. "Smart Consumers in the Internet of Energy : Flexibility Markets & Services from Distributed Energy Resources," Other publications TiSEM 2edb43b5-bbd6-487d-abdf-7, Tilburg University, School of Economics and Management.
    20. Sapio, Alessandro, 2019. "Greener, more integrated, and less volatile? A quantile regression analysis of Italian wholesale electricity prices," Energy Policy, Elsevier, vol. 126(C), pages 452-469.
    21. Thomas-Olivier Léautier & Véronique Thelen, 2009. "Optimal expansion of the power transmission grid: why not?," Post-Print hal-02402972, HAL.
    22. Kyritsis, Evangelos & Andersson, Jonas & Serletis, Apostolos, 2017. "Electricity prices, large-scale renewable integration, and policy implications," Energy Policy, Elsevier, vol. 101(C), pages 550-560.
    23. David P. Brown & David E. M. Sappington, 2017. "Designing Compensation for Distributed Solar Generation: Is Net Metering Ever Optimal?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    24. Rintamäki, Tuomas & Siddiqui, Afzal S. & Salo, Ahti, 2017. "Does renewable energy generation decrease the volatility of electricity prices? An analysis of Denmark and Germany," Energy Economics, Elsevier, vol. 62(C), pages 270-282.
    25. Parrish, Bryony & Heptonstall, Phil & Gross, Rob & Sovacool, Benjamin K., 2020. "A systematic review of motivations, enablers and barriers for consumer engagement with residential demand response," Energy Policy, Elsevier, vol. 138(C).
    26. Brunekreeft, Gert, 2015. "Network unbundling and flawed coordination: Experience from the electricity sector," Utilities Policy, Elsevier, vol. 34(C), pages 11-18.
    27. Steve Dahlke and Matt Prorok, 2019. "Consumer Savings, Price, and Emissions Impacts of increasing Demand Response in the Midcontinent Electricity Market," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    28. Severin Borenstein, 2005. "The Long-Run Efficiency of Real-Time Electricity Pricing," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 93-116.
    29. Graham, Stephen & Marvin, Simon, 1994. "Cherry picking and social dumping : Utilities in the 1990s," Utilities Policy, Elsevier, vol. 4(2), pages 113-119, April.
    30. Crew, Michael A & Fernando, Chitru S & Kleindorfer, Paul R, 1995. "The Theory of Peak-Load Pricing: A Survey," Journal of Regulatory Economics, Springer, vol. 8(3), pages 215-248, November.
    31. Wang, Jianhui & Liu, Cong & Ton, Dan & Zhou, Yan & Kim, Jinho & Vyas, Anantray, 2011. "Impact of plug-in hybrid electric vehicles on power systems with demand response and wind power," Energy Policy, Elsevier, vol. 39(7), pages 4016-4021, July.
    32. Blarke, Morten B., 2012. "Towards an intermittency-friendly energy system: Comparing electric boilers and heat pumps in distributed cogeneration," Applied Energy, Elsevier, vol. 91(1), pages 349-365.
    33. Frank A. Wolak, 2011. "Do Residential Customers Respond to Hourly Prices? Evidence from a Dynamic Pricing Experiment," American Economic Review, American Economic Association, vol. 101(3), pages 83-87, May.
    34. Zugno, Marco & Morales, Juan Miguel & Pinson, Pierre & Madsen, Henrik, 2013. "A bilevel model for electricity retailers' participation in a demand response market environment," Energy Economics, Elsevier, vol. 36(C), pages 182-197.
    35. Rodrigues, Renato & Linares, Pedro, 2015. "Electricity load level detail in computational general equilibrium – part II – welfare impacts of a demand response program," Energy Economics, Elsevier, vol. 47(C), pages 52-67.
    36. Laffont, Jean-Jacques & Tirole, Jean, 1990. "Optimal Bypass and Cream Skimming," American Economic Review, American Economic Association, vol. 80(5), pages 1042-1061, December.
    37. Schittekatte, Tim & Momber, Ilan & Meeus, Leonardo, 2018. "Future-proof tariff design: Recovering sunk grid costs in a world where consumers are pushing back," Energy Economics, Elsevier, vol. 70(C), pages 484-498.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Maksymilian Kochański & Katarzyna Korczak & Tadeusz Skoczkowski, 2021. "Enablers and Barriers in the Market-Driven Rollout of Smart Metering: Polish Technology Innovation System Analysis," Energies, MDPI, vol. 14(17), pages 1-28, August.
    2. Vasileios M. Laitsos & Dimitrios Bargiotas & Aspassia Daskalopulu & Athanasios Ioannis Arvanitidis & Lefteri H. Tsoukalas, 2021. "An Incentive-Based Implementation of Demand Side Management in Power Systems," Energies, MDPI, vol. 14(23), pages 1-24, November.
    3. Josh Eichman & Marc Torrecillas Castelló & Cristina Corchero, 2022. "Reviewing and Exploring the Qualitative Impacts That Different Market and Regulatory Measures Can Have on Encouraging Energy Communities Based on Their Organizational Structure," Energies, MDPI, vol. 15(6), pages 1-19, March.
    4. Guntram Pressmair & Christof Amann & Klemens Leutgöb, 2021. "Business Models for Demand Response: Exploring the Economic Limits for Small- and Medium-Sized Prosumers," Energies, MDPI, vol. 14(21), pages 1-28, October.
    5. Luca Mendicino & Daniele Menniti & Anna Pinnarelli & Nicola Sorrentino & Pasquale Vizza & Claudio Alberti & Francesco Dura, 2021. "DSO Flexibility Market Framework for Renewable Energy Community of Nanogrids," Energies, MDPI, vol. 14(12), pages 1-19, June.
    6. D’Ettorre, F. & Banaei, M. & Ebrahimy, R. & Pourmousavi, S. Ali & Blomgren, E.M.V. & Kowalski, J. & Bohdanowicz, Z. & Łopaciuk-Gonczaryk, B. & Biele, C. & Madsen, H., 2022. "Exploiting demand-side flexibility: State-of-the-art, open issues and social perspective," Renewable and Sustainable Energy Reviews, Elsevier, vol. 165(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Giulietti, Monica & Le Coq, Chloé & Willems, Bert & Anaya, Karim, 2019. "Smart Consumers in the Internet of Energy : Flexibility Markets & Services from Distributed Energy Resources," Other publications TiSEM 2edb43b5-bbd6-487d-abdf-7, Tilburg University, School of Economics and Management.
    2. Clastres, Cédric & Khalfallah, Haikel, 2021. "Dynamic pricing efficiency with strategic retailers and consumers: An analytical analysis of short-term market interactions," Energy Economics, Elsevier, vol. 98(C).
    3. Cédric Clastres & Haikel Khalfallah, 2021. "Dynamic pricing efficiency with strategic retailers and consumers: An analytical analysis of short-term market interactions," Post-Print hal-03193212, HAL.
    4. Cédric Clastres & Haikel Khalfallah, 2020. "Retailers' strategies facing demand response and markets interactions," Working Papers hal-03167543, HAL.
    5. Marchetti, Isabella & Rego, Erik Eduardo, 2022. "The impact of hourly pricing for renewable generation projects in Brazil," Renewable Energy, Elsevier, vol. 189(C), pages 601-617.
    6. Macedo, Daniela Pereira & Marques, António Cardoso & Damette, Olivier, 2022. "The role of electricity flows and renewable electricity production in the behaviour of electricity prices in Spain," Economic Analysis and Policy, Elsevier, vol. 76(C), pages 885-900.
    7. Hoarau, Quentin & Perez, Yannick, 2019. "Network tariff design with prosumers and electromobility: Who wins, who loses?," Energy Economics, Elsevier, vol. 83(C), pages 26-39.
    8. Huisman, Ronald & Stet, Cristian, 2022. "The dependence of quantile power prices on supply from renewables," Energy Economics, Elsevier, vol. 105(C).
    9. Tselika, Kyriaki, 2022. "The impact of variable renewables on the distribution of hourly electricity prices and their variability: A panel approach," Energy Economics, Elsevier, vol. 113(C).
    10. Avau, Michiel & Govaerts, Niels & Delarue, Erik, 2021. "Impact of distribution tariffs on prosumer demand response," Energy Policy, Elsevier, vol. 151(C).
    11. Macedo, Daniela Pereira & Marques, António Cardoso & Damette, Olivier, 2021. "The Merit-Order Effect on the Swedish bidding zone with the highest electricity flow in the Elspot market," Energy Economics, Elsevier, vol. 102(C).
    12. Ciarreta, Aitor & Pizarro-Irizar, Cristina & Zarraga, Ainhoa, 2020. "Renewable energy regulation and structural breaks: An empirical analysis of Spanish electricity price volatility," Energy Economics, Elsevier, vol. 88(C).
    13. Maniatis, Georgios I. & Milonas, Nikolaos T., 2022. "The impact of wind and solar power generation on the level and volatility of wholesale electricity prices in Greece," Energy Policy, Elsevier, vol. 170(C).
    14. Olkkonen, Ville & Ekström, Jussi & Hast, Aira & Syri, Sanna, 2018. "Utilising demand response in the future Finnish energy system with increased shares of baseload nuclear power and variable renewable energy," Energy, Elsevier, vol. 164(C), pages 204-217.
    15. Wolf-Peter Schill & Juan Rosellón & Jonas Egerer, 2011. "Regulated Expansion of Electricity Transmission Networks: The Effects of Fluctuating Demand and Wind Generation," Discussion Papers of DIW Berlin 1109, DIW Berlin, German Institute for Economic Research.
    16. Mwampashi, Muthe Mathias & Nikitopoulos, Christina Sklibosios & Konstandatos, Otto & Rai, Alan, 2021. "Wind generation and the dynamics of electricity prices in Australia," Energy Economics, Elsevier, vol. 103(C).
    17. Peter M. Schwarz, Nathan Duma, and Ercument Camadan, 2023. "Compensating Solar Prosumers Using Buy-All, Sell-All as an Alternative to Net Metering and Net Purchasing: Total Use, Rebound, and Cross Subsidization," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
    18. Bell, William Paul & Wild, Phillip & Foster, John & Hewson, Michael, 2017. "Revitalising the wind power induced merit order effect to reduce wholesale and retail electricity prices in Australia," Energy Economics, Elsevier, vol. 67(C), pages 224-241.
    19. Krishnamurthy, Chandra Kiran B. & Vesterberg, Mattias & Böök, Herman & Lindfors, Anders V. & Svento, Rauli, 2018. "Real-time pricing revisited: Demand flexibility in the presence of micro-generation," Energy Policy, Elsevier, vol. 123(C), pages 642-658.
    20. Macedo, Daniela Pereira & Marques, António Cardoso & Damette, Olivier, 2020. "The impact of the integration of renewable energy sources in the electricity price formation: is the Merit-Order Effect occurring in Portugal?," Utilities Policy, Elsevier, vol. 66(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jeners:v:13:y:2020:i:21:p:5672-:d:437179. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.