The Economics of Explicit Demand-Side Flexibility in Distribution Grids: The Case of Mandatory Curtailment for a Fixed Level of Compensation

Robert Schuman Centre for Advanced Studies Working Papers, ISSN 1028-3625, 2020

31 Pages Posted: 14 Oct 2020

See all articles by Athir Nouicer

Athir Nouicer

Florence School of Regulation/ KU Leuven University; Comillas Pontifical University

Leonardo Meeus

Vlerick Business School; European University Institute

Erik Delarue

KU Leuven

Date Written: July 20, 2020

Abstract

Demand-side flexibility can be incentivised to reduce the need for investment in distribution grids either implicitly or explicitly. Implicit demand-side flexibility is when prosumers react to price signals triggered by network tariffs. Explicit demand-side flexibility is when the DSO can contract flexibility. In this paper, we focus on one contractual arrangement: mandatory curtailment by the DSO for a fixed level of compensation. We develop a long-term bi-level equilibrium model. The upper level (UL) is a regulated DSO deciding on the network investment and/or curtailing consumers for a fixed level of compensation. The lower level (LL) consists of consumers, which can be prosumers or passive consumers. Prosumers can invest in solar PV and battery systems. They react to the network tariffs and to the compensation provided by the DSO for curtailing them. The regulated DSO anticipates the reaction of the consumers when investing in the network and when setting the level of curtailment. Network tariffs are set to recover the network costs and the payments made to consumers that have been curtailed. We find that the economics of explicit demand-side flexibility in distribution grids are positive, and they are more positive when tariffs are cost-reflective. This implies that we cannot avoid redesigning tariffs by using explicit demand flexibility. We also find that setting an appropriate level of compensation is difficult in the presence of prosumers and passive consumers. A level of compensation that is high enough for passive consumers will be gamed by prosumers.

Keywords: Bi-Level Modelling, Demand-Side Flexibility, Distribution Network Investment, Flexibility Compensation, Network Tariffs, Prosumers

JEL Classification: C7, D61, L94, L97, Q4

Suggested Citation

Nouicer, Athir and Meeus, Leonardo and Delarue, Erik, The Economics of Explicit Demand-Side Flexibility in Distribution Grids: The Case of Mandatory Curtailment for a Fixed Level of Compensation (July 20, 2020). Robert Schuman Centre for Advanced Studies Working Papers, ISSN 1028-3625, 2020, Available at SSRN: https://ssrn.com/abstract=3665989 or http://dx.doi.org/10.2139/ssrn.3665989

Athir Nouicer (Contact Author)

Florence School of Regulation/ KU Leuven University ( email )

Belgium
50133 (Fax)

Comillas Pontifical University ( email )

Calle de Alberto Aguilera, 23, 28015
Madrid
Spain

Leonardo Meeus

Vlerick Business School ( email )

Library
REEP 1
Gent, BE-9000
Belgium

European University Institute ( email )

Villa Schifanoia
133 via Bocaccio
Firenze (Florence), Tuscany 50014
Italy

Erik Delarue

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

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