AN ANALYTICAL APPROACH TO ACTIVATING DEMAND ELASTICITY WITH A DEMAND RESPONSE MECHANISM

03-12-2015 -  Cédric CLASTRES and Haikel KHALFALLAH

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Keywords: Demand Response, Price Signals, Welfare Analysis.
JEL Classification: C61, L11, Q41.


ABSTRACT
The aim of this work is to demonstrate analytically the conditions under which activating the elasticity of consumer demand could benefit social welfare. We have developed an analytical equilibrium model to quantify the effect of deploying demand response on social welfare and energy trade. The novelty of this research is that it demonstrates the existence of an optimal area for the price signal in which demand response enhances social welfare. This optimal area is negatively correlated to the degree of competitiveness of generation technologies and the market size of the system. In particular, it should be noted that the value of un-served energy or energy reduction which the producers could lose from such a demand response scheme would limit its effectiveness. This constraint is even greater if energy trade between countries is limited. Finally, we have demonstrated scope for more aggressive demand response, when only considering the impact in terms of consumer surplus.

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