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Present trends in the development of electricity systems are expected to generate a growing need for flexibility in decentralised resources, including demand response. In order to enable decentralised actors to create value, the organisation of markets and incentives should incorporate these new participants. The roll-out of smart metering to electricity consumers is an important precondition to establishing a flexible demand side and will provide essential information flows. On the basis of current incentive structures and related risks, however, the pass-through of information and value from wholesale market participants to the demand side is mostly infeasible, resulting in flexibility tasks being aggregated and delegated to balancing responsible wholesale traders. This analysis focuses on whether current incentives and roles are appropriate and where the design could be improved to establish a flexible demand side with a particular focus on the Danish case. Design-related barriers are identified that affect expected value, associated risks, and the distribution of responsibilities. This serves as a basis to define policy options in the context of Nordic electricity markets.
Dynamic pricing of retail electricity, as opposed to the widely applied average pricing, has often been proposed to enhance economic efficiency through demand response. The development of variable production from renewable energies and expectations about the installation of heat pumps and electric vehicles has now reinforced interest in flexible demand and dynamic pricing. With a roll‐out of smart metering one important technical hurdle is going to be cleared, and dynamic retail pricing may soon become an eligible option for many households. We quantify the potential incentives to adopt new pricing schemes using exemplary Danish data. Until now, limited activity of household consumers on retail markets indicates that switching supplier or contract is perceived costly. We apply the concept of switching costs to explain this hesitant behavior, and use it to estimate a threshold level based on recent observations in the Danish market. We calculate potential savings from dynamic pricing and show how the choice of electricity taxation technique may hamper or enhance potential benefits. In the light of switching costs, our results suggest that the combination of smart meter roll‐out and dynamic pricing offerings might be insufficient to convince the majority of households to switch contracts and become active in response to prices, unless they hold a substantial flexibility potential. Dynamic taxation, even if applied to parts of the levies, could contribute significantly to inducing flexible consumption. WIREs Energy Environ 2018, 7:e270. doi: 10.1002/wene270.
This article is categorized under:
Energy Infrastructure > Economics and Policy
Energy Systems Economics > Economics and Policy
Energy Policy and Planning > Economics and Policy
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