Understanding Demand: The Missing Link in Efficient Electricity Markets

Published: September 2001


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Two basic criteria for markets to operate efficiently are that participants have sufficient information to make informed decisions and that there is competition. The recent deregulation of the electric utility industry has witnessed a dearth of competition in retail markets due to a lack of price signals being passed to consumers, thereby creating inefficiencies in market dynamics. These problems have occurred as a result of ill-defined market structures and policies that have focused on supply side issues while giving short-shrift to demand side effects. This paper illustrates that demand responsiveness is a necessary criterion for the efficient operation of electricity markets. The technical and market mechanisms necessary to implement responsive demand are explored. In particular, it proposes a role for load serving entities (LSE) as load aggregators and market participants and establishes the need for a control system that couples electric loads to market price signals. Technologies necessary for accommodating demand response such as, real-time metering and “smart” controls are described along with examples of their potential load shaving benefits.