The Economics of Demand-side Flexibility in Distribution Grids

To avoid unnecessary distribution network investments, distribution tariffs are ex-pected to become more cost-reflective, and DSOs are expected to procure flexibil-ity. This will provide an implicit and an explicit incentive to provide demand-side flexibility. In this paper, we develop a long-term bi-level equilibrium model. In the upper level, the DSO optimizes social welfare by deciding the level of investment in the distribution network and/or curtailing consumers. The regulated DSO also sets a network tariff to recover the network and flexibility costs. In the lower level, the consumers, active and passive, maximize their own welfare. We find that im-plicit and explicit incentives for demand-side flexibility are complementary regu-latory tools, but there are limits. If network tariffs are too imperfect, the resulting consumption profiles can become too expensive to fix with curtailment. We also find that it is difficult to set an appropriate level of compensation because of the reaction by prosumers.

Automated summary

To avoid unnecessary distribution network investments, it is expected that distribution tariffs will become more cost-reflective and Distribution System Operators (DSOs) will procure flexibility. The paper develops a long-term bi-level equilibrium model where the DSO optimizes social welfare and sets network tariffs while consumers maximize their own welfare. The study finds that implicit and explicit incentives for demand-side flexibility are complementary regulatory tools, but there are limits and difficulties in setting appropriate compensation levels due to prosumer reaction.