Demand-side energy efficiency, demand response, and carbon tax

The growing penetration of renewable energy sources has increased the need for flexibility in power systems to manage supply-side fluctuations. Demand response (DR) plays a key role in decarbonizing electricity balancing operations, serving as a flexible and low-carbon alternative to conventional thermal power generation to address supply–demand imbalances. This paper demonstrates how demand-side energy use efficiency affects DR and total CO2 emissions in electricity markets. We analyze a model consisting of a day-ahead market and balancing operations with a focus on CO2 emissions. The marginal cost of DR corresponds to the marginal utility of electricity consumption. Enhanced energy efficiency increases the marginal cost of DR, thereby increasing thermal power generation in the balancing phase. Thus, an improvement in demand-side energy efficiency can increase emissions during the balancing operation while decreasing emissions attributed to the day-ahead market. Counterintuitively, our analysis reveals that improved energy efficiency could increase total CO2 emissions when the emission factor of conventional power generation in the day-ahead market is sufficiently small. As energy efficiency improves, the carbon tax rate needs to be raised to deter such perverse effects, expanding the use of DR in the balancing period.