Inciting Residential Demand Side Participation in Electricity Markets: Three Elasticity Issues That Stand in the Way

Abstract

Engaging demand side participation and distributed energy resources (DERs) in electricity markets, is imperative to smart grid adoption. However, stimulating the demand side requires that consumers are elastic to wholesale prices that vary by time and location. In broadly evaluating residential retail consumer elasticity, I find that three primary “elasticity issues” inhibit consumer price elasticity. The foundational “elasticity issue” is that consumers aren't given the opportunity to be price responsive, as the vast majority of US households continue to purchase electricity on averaged flat-rates, that fail to signal cost and value to consumers. The second “elasticity issue” pertains to consumers inability to be price responsive when exposed to ever changing prices. The third “elasticity issue” addresses the lack of consumer willingness to be price responsive, and the presence of consumer apathy in managing their electricity costs. Solving the “elasticity issues” requires that consumers be exposed to wholesale market conditions, be equipped with technologies that make price response easy, and needn't lift a thumb to do either. This will likely necessitate a twofold solution. A significant policy intervention whereby utilities are required to change the default retail rate to one that is dynamic and value based, and the entrance of new third-party energy service companies (ESCO), that outfit consumers with flexible assets, where the tariff signals value.