The effect of sociodemographic diversity of residential customers on the financial risk experienced in the retail electricity market

Abstract

The sociodemographic diversity of residential customers can affect the level of financial risk that an electricity provider experiences in the retail market. To demonstrate the relationship between sociodemographic diversity and financial risk, electricity consumption data drawn from the United Kingdom Power Networks 'Low Carbon London' project was analyzed to explore the relationship between sociodemographic diversity and financial risk experienced by electricity retailers. The results show that when increasing the sociodemographic diversity amongst a group of residential customers the effect on financial risk depends on the electricity consumption patterns of individual customers and the relationship of consumption patterns between residential customers. Increasing sociodemographic diversity amongst residential customers with very distinct energy consumption patterns can decrease the overall financial risk associated with the aggregated revenue received from these customers. However, the results showed that adding customers to a customer base without consideration for their sociodemographic background can cause the overall financial risk associated with the aggregated revenue received to change erratically. Whilst previous studies have considered customer diversity and its influence on peak electricity demand, this research advances the stateof-the-art by showing the importance of customer diversity to the financial quantity risk experienced by electricity retailers. This finding has serious implications for electricity providers seeking to mitigate financial risk in the retail electricity market.