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Impact of Demand-side Energy Efficiency on the Electricity Balancing Market and Environmental Policy

Author

Listed:
  • Yukihide Kurakawa

    (Kanazawa Seiryo University.)

  • Makoto Tanaka

    (National Graduate Institute for Policy Studies.)

Abstract

This paper shows how demand-side energy use efficiency affects demand response (DR) and total CO2 emissions. The marginal cost of DR corresponds to the marginal utility of electricity consumption. Thus, improved energy efficiency increases the marginal cost of DR and increases thermal power generation in balancing markets. We analyze a model consisting of a day-ahead and balancing market and examine CO2 emissions from each market. Improved energy efficiency decreases emissions from the day-ahead market while increasing emissions from the balancing market. The analysis reveals that improved energy efficiency could increase total emissions when the emission factor of the marginal plant in the day-ahead market is sufficiently small. Raising the carbon tax rate as energy efficiency improves will be necessary to deter such perverse effects, expanding the use of DR in the balancing market.

Suggested Citation

  • Yukihide Kurakawa & Makoto Tanaka, 2025. "Impact of Demand-side Energy Efficiency on the Electricity Balancing Market and Environmental Policy," RIEEM Discussion Paper Series 2501, Research Institute for Environmental Economics and Management, Waseda University.
    • Handle: RePEc:was:dpaper:2501
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    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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