Demand Participation in Balancing Markets

The importance of flexible demand resources for the future of electricity markets is clearly documented in recent policy reforms. Against this background, we theoretically analyze the deployment of demand resources in an electricity balancing market and investigate the economic effects on that market and a preceding wholesale electricity market. Absent of speculative behavior on the parts of consumers and electricity producers, demand participation clearly enhances market efficiency and reduces the tax burden to keeping the system in balance. Differently, once we introduce speculative behavior, the effect of demand participation is more ambiguous, as this has severe feedback effects on the output traded on the wholesale market.