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Integration of Demand Response in Electricity Market Capacity Mechanisms

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  • Lambin, Xavier

Abstract

Ensuring that the power system meets demand peaks is a key challenge of liberalized markets. On the supply side, capacity can be supported through a Capacity Remuneration Mechanism (CRM). On the demand side, Demand Response (DR) technologies can be deployed. We find that while all traditional generation should receive the same payment, capacity payments for DR technologies should gradually decrease based on operators’ position in the load-shedding order. We observe that all CRM schemes currently implemented provide inadequate incentives to non-price responsive DR and propose to adjust payments to DR units as a function of their expected activation periods.

Suggested Citation

  • Lambin, Xavier, 2020. "Integration of Demand Response in Electricity Market Capacity Mechanisms," Utilities Policy, Elsevier, vol. 64(C).
    • Handle: RePEc:eee:juipol:v:64:y:2020:i:c:s095717872030028x
    DOI: 10.1016/j.jup.2020.101033
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    References listed on IDEAS

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    2. Stefano Bolatto & Elias Carroni & Riccardo Pesci & Michele Rabasco, 2025. "An Economic Theory of Market Interactions within Energy Communities," Working Papers wp1204, Dipartimento Scienze Economiche, Universita' di Bologna.
    3. Maja Božičević Vrhovčak & Bruno Malbašić, 2023. "Unlocking the Value of Aggregated Demand Response: A Survey of European Electricity Markets," Energies, MDPI, vol. 16(17), pages 1-13, September.
    4. Pär Holmberg & Thomas Tangerås, 2021. "Strategic Reserves versus Market-wide Capacity Mechanisms," Working Papers EPRG2109, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    5. Sanchez Jimenez, I. & Bruninx, K. & de Vries, L.J., 2025. "Capacity remuneration mechanisms for decarbonized power systems," Applied Energy, Elsevier, vol. 391(C).
    6. Brito-Pereira, Paulo & Mastropietro, Paolo & Rodilla, Pablo & Barroso, Luiz Augusto & Batlle, Carlos, 2022. "Adjusting the aim of capacity mechanisms: Future-proof reliability metrics and firm supply calculations," Energy Policy, Elsevier, vol. 164(C).
    7. Huang, Zhenyu & Liu, Youbo & Li, Kecun & Liu, Jichun & Gao, Hongjun & Qiu, Gao & Shen, Xiaodong & Liu, Junyong, 2023. "Evaluating long-term profile of demand response under different market designs: A comparison of scarcity pricing and capacity auction," Energy, Elsevier, vol. 282(C).
    8. Capper, Timothy & Kuriakose, Jaise & Sharmina, Maria, 2024. "Facilitating domestic demand response in Britain’s electricity system," Utilities Policy, Elsevier, vol. 89(C).

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