Demand Participation in Electricity Balancing Markets

The importance of flexible demand resources for the future of electricity markets is clearly documented in recent European 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 speculative behavior on the parts of consumers and electricity producers, demand participation clearly enhances market efficiency and reduces the costs of keeping the system in balance. Differently, once we introduce speculative behavior, the effect of demand participation becomes more complex, as speculation has significant feedback effects on the output traded in the wholesale market.