the integration of demand response in capacity mechanisms · the integration of demand response in...

Introduction Model Value of DR Case studies Conclusion app

THE INTEGRATION OF DEMAND RESPONSEIN CAPACITY MECHANISMS

presentation by Xavier LambinToulouse School of Economics, ENGIE1

June 21, 2017

1The views expressed in the present article are my own, and do notnecessarily represent the views of ENGIE or any other institution

1/ 13 Xavier Lambin, TSE The integration of DR in CRMs


Motivation

Why talking about DR in CRMs?

Increasing concern over adequacy : CRM and DR schemes areproposed in many European countries.

The role of DR is a key criteria for DG Comp to evaluateCRMs.

Huge DR potential (Sia partners : 52GW in Europe)



What we do

What this paper does not do:

account of the (very important) problems of asymmetry ofinfo on volumes

⇒ Desired load is fixed

assess what is the optimal CRM contribution of consumers

⇒ Consumers have paid their contribution

address the concerns over DR technical reliability

⇒ all generation, and DR, are 100 % reliable



What we do

What this paper does: Find the socially optimal capacitypayment for (very) stylized DR.

Without intervention, each potential DR operator i wouldconsume a fixed, common knowledge, quantity of electricity.

The value of consumption Vi is constant over time and isprivate information of DR operator i .

DR operators are price-takers.

Operator i ’s cost of installation of the DR technology is ri .



DR’s marginal costs can be much higher than traditionalgeneration



Model – players

Two types of consumers:

1 ”Households”: Have value of lost load Vh, cannot be madeprice-responsive. Have stochastic demand.

2 ”Industry”: Opportunity cost of consumption in [0,+∞](private information). Technical ability to shed load voluntarily

In case of scarcity, TSO curtails the households.



Model –timing

Timing:

1 TSO offers a menu MM(V ) of payment to DR operators, inexchange of which the TSO can request load reduction instates of the world L(V ).

2 Potential DR operators accept/reject. They then invest inthe DR technology at cost ri .

3 Desired demand realizes

4 DR may activate, either prompted by high prices, or uponrequest from TSO if a contract was signed.



Gross value, market revenues, missing money



Optimal payment to generation, wrt activation trigger

Conclusion: payments to ”upon-request” load-shedding must belower than price-responsive DR:



Case 1: No capacity payment to DR – ”status quo”market design

Only those who can survive with EM prices offer DR – i.e. thosewith Vi < P̄, and ri (Vi ) < r∗i (Vi )−MM

There is not enough entry in the DR business.



Case 2 : Full capacity payment – France (also UK)

Capacity is certified on the basis of technical availability at timesof scarcity. DR is activated upon request from TSO. Even DRwith V > Vh enter as long as ri (V ) < MM +

∫LV

(P̄ − V )f (l)dl

Explicit participation: payment is excessive. There is excess entry

Implicit participation: constitutes a hidden subsidy!



Extensions

Allow for time-inconsistency of Vi

Address the case where the regulator’s objective function isbiased against DR operators: need to leave info rent to”good” type, distort activation periods.

Allow for asymmetry of information on load-shedding volumeavailability.



Conclusion

It is crucial to know whether DR will activate before marketprices hit the cap (p < P̄) or after (p = P̄).

At any rate, if a DR operator does not commit to activate ata price p < P̄ but instead awaits a request from the TSO, heshould receive only a portion of the capacity payment.



Appendix



Motivation

Should DR really be treated as generation? (i.e. receive fullcapacity payment?)

”Yes”:At times of scarcity, whether we increase generation, or shedload, it participates all the same to alleviating ”scarcity”DR of operator i is like generation, except that marginal costis not fuel cost, but the value of consumption Vi

”No”:Value of consumption Vi is hard to estimateVi varies widely across consumer, time, duration of theload-sheddingVi can be substantially higher than fuel costs, price cap, orsystem VOLL... amongst other things (reliability, location, measurement,notification problems...)



Model –notations

Since baseline consumption for each operator i is public knowledge,DRi can be considered as a generating unit with marginal costsequal to the gross value of consumption Vi . Denote:

K : installed traditional generation – for simplicity, only onetechnology.

l : total demand if price were at a constant price c . Followsdistribution F (.). Can think of l as l = l0 + l1 where:

l0 is stochastic demand from non-price responsive residential(Vh)l1 is constant industrial demand, with some DR potential

Vh: the system VOLL when random curtailment needs to bedone. (may depend on DR(.)).



Value of DR

Gross social benefit of activating DR i , is driven by the value ofconsumption of the first unserved consumer:

B(Vi ) =

∫LVi

Vf (l)f (l)dl

To reach optimality in equilibrium, TSO wants to make sure DRoperator receives B(Vi ), such that there is entry iff

ri (Vi ) +

∫LVi

Vi f (l)dl < B(Vi )

Part of these revenues will come from the energy market: TSOneeds to pay the rest, henceforth denoted MM(Vi ):

MM(Vi ) = B(Vi )− EM(Vi )



Payment to thermal, low marginal cost capacity

Assume the TSO provides additional payment (through aCRM) so as to get the optimal capacity level. The social costof peak generation must equate the social benefit.

r =

∫ ∞K

(V (l)− c)+f (l)dl

The optimal capacity payment m, is such that generationrecovers its investment costs:

m = r − EMrevenues =

∫ ∞K

(V (l)− c)+f (l)dl −∫ ∞

0

(p(l)− c)+f (l)dl

=

∫ K+DR(Vh)

K+DR(P̄)

(V (l)− P̄)f (l)dl + (Vh − P̄)(1− F (K + DR(Vh)))

≡ MM

i.e. the capacity payment must compensate for the missingmoney. Can show the same payment is needed to allgeneration for all c ∈ [0, P̄]



Remuneration of DR: Vi < P̄

DR operators may be allowed to re-sell their load-reduction in theenergy market:

Sales on the energy market:

EM(Vi ) =

∫LVi∩{p<P̄}

Vf (l)f (l)dl +

∫LVi∩{p=P̄}

P̄f (l)dl

Gross social value:

B(Vi ) =

∫LVi∩{p<P̄}

Vf (l)f (l)dl +

∫LVi∩{p=P̄}

Vf (l)f (l)dl

TSO needs to give the missing money:

MM(Vi ) = B(Vi )− EM(Vi ) =

∫LVi∩{p=P̄}

(Vf (l)− P̄)f (l)dl

≡ MM (∀Vi < P̄, {LVi∩ {p = P̄}} = {p = P̄})



Remuneration of DR: P̄ ≤ Vi ≤ Vh

If Vi ≥ P̄, DR operator never activates, unless it signed a contractwith the TSO. DR is activated only if p = P̄ i.e.{LVi

∩ {p = P̄}} = {LVi}

Sales on the energy market: EM(Vi ) =∫

LViP̄f (l)dl

Gross social value: B(Vi ) =∫

LViVf (l)f (l)dl


MM(Vi ) = B(Vi )− EM(Vi ) =

∫LVi


< MM

V ′ > V > P̄ ⇒ LV ′ ⊂ LV

⇒ Payment MM(V ) is decreasing in V!



Remuneration of DR: Vh < V

Assume the TSO allows this DR to activate in states of the worldLV just before resorting to random curtailment.

Sales on the energy market: EM(V ) =∫

LVP̄f (l)dl

Opportunity cost: C (V ) =∫

LVVf (l)dl


MM(V ) = W (V ) + C (V )− EM(V ) =

∫LV


=

∫LV

(Vh − P̄)f (l)dl ≡ MM

There will be entry iff

ri (V ) < W (V ) =

∫LV

(Vf (l)− V )f (l)dl ≤∫

LV

(Vh − V )f (l)dl < 0

⇒ The TSO will not activate this technology (i.e. {LV } = ∅ )unless it creates some value, through other channels.



Summary: Payment to demand-response

Let’s follow the same methodology. The social cost of generationmust equate the social benefit.

If v < P̄: same equations: pay MM(v) = MM

If v > Vh: gross social benefit (Vh − Vi )(1− F (K + DR(Vh)))

⇒ pay MM(v) = (Vh − P̄)(1− F (K + DR(Vh))) = MM

General case:

MM(v) = Social benefit − EMrevenues

=

∫ K+DR(Vh)

K+DR(min(max(v,P̄),Vh)))(V (l)− P̄)f (l)dl + (Vh − P̄) (1− F (K + DR(Vh)))

m(v) is weakly decreasing in v .



Uncertain value of demand

At the moment the contract is signed, the DR operator might notknow their future value of consumption when it will be requestedto shed load.Some cases are easy to handle. Assume DR operators knows itsVOLL is in [Vmin,Vmax ].

If Vmax < P̄ : offer MM, as at times of scarcity all DR isactivated.

add a risk penalty? the fact the activation trigger of DR is notknown in advance increases the risk of investment intraditional generation technologies

If Vmin > Vh : offer m′′ ∈ [0,MM]

Otherwise... offer: MM ∗ Duration of activationiSystem LOLP ?



VOLL estimates



Preview of the results

We’ll show that capacity payment to DR should depend ontheir ranking in the activation order:

Key is to identify the participation of each generation facilityin times of scarcity. When there is scarcity, p = P̄:

All rational thermal generation facility generates: should getfull capacity paymentAll rational DR with Vi < P̄ shed load: should get full capacitypaymentAll rational DR with Vi > P̄ shed load if they have signed acontract and are accordingly requested to decreaseconsumption. Intuition: should be partially paid for capacity,depending on their likelihood to be activated.


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