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Impacts of market power in the day-ahead electricity market on incentive-based demand response

Author

Listed:
  • Yukihide Kurakawa

    (Kanazawa Seiryo University.)

  • Makoto Tanaka

    (National Graduate Institute for Policy Studies.)

Abstract

This study demonstrates how market power in the day-ahead electricity market influences the balancing cost in incentive-based demand response (DR) programs. The marginal cost of DR in an incentive-based DR program corresponds to the marginal benefit of energy services that might be provided under baseline electricity consumption. We analyze a stylized Cournot oligopoly model and demonstrate that distortion of an imperfectly competitive day-ahead market generates additional social cost (welfare loss) in the balancing period by increasing the cost of DR. We further investigate the case where some firms in the day-ahead market can also benefit from power generation in the balancing period and demonstrate that the strategic behavior of these firms further decreases total supply in an imperfectly competitive day- ahead market. The results indicate that procompetitive policies in the day-ahead market will lower the cost of DR, which makes demand more flexible and yields additional welfare gains, thereby lowering the balancing cost during the balancing period.

Suggested Citation

  • Yukihide Kurakawa & Makoto Tanaka, 2023. "Impacts of market power in the day-ahead electricity market on incentive-based demand response," RIEEM Discussion Paper Series 2303, Research Institute for Environmental Economics and Management, Waseda University.
    • Handle: RePEc:was:dpaper:2303
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    References listed on IDEAS

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    1. repec:aen:journl:2011v32-01-a07 is not listed on IDEAS
    2. Hung-po Chao & Mario DePillis, 2013. "Incentive effects of paying demand response in wholesale electricity markets," Journal of Regulatory Economics, Springer, vol. 43(3), pages 265-283, June.
    3. Anderson, Edward J. & Hu, Xinmin, 2008. "Forward contracts and market power in an electricity market," International Journal of Industrial Organization, Elsevier, vol. 26(3), pages 679-694, May.
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    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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