Dynamic tariffs, demand response, and regulation in retail electricity markets

Greater penetration of renewables in electricity generation will result in high variability in residual demand (demand net of renewable generation); this will further challenge the stability and flexibility of power systems. One possible solution is demand response, which is usually achieved through dynamic tariffs that offer consumers financial incentives to shift or reduce peak load to off-peak periods. We construct a two-stage dynamic game to model the retail market, in which the retailer sets dynamic tariffs to maximize profit, and consumers respond to the prices. Using the Irish smart metering data as model inputs, we find that in our baseline scenario, the dynamic tariff would generate for the retailer an additional €7.35 of annual profit from a representative Irish household. With market regulations, the dynamic tariff will benefit consumers and retailers alike. We also find that the interaction between demand-side management stimuli and market regulation can further reduce consumer-level electricity demand, increase retail profit, and lower consumers’ electricity bills.