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 US residential retail consumer elasticity, I find that three primary “elasticity issues” inhibit demand side participation. The foundational “elasticity issue” is that residential consumers aren’t given the opportunity to be price responsive, as the vast majority of households continue to purchase electricity on averaged flat-rates, that fail to signal cost and value to consumers. The second “elasticity issue” pertains to consumer’s 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 that both the former and the latter are effectively done for them. 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 and DERs, where the tariff signals value.