International Association for Energy Economics | 43 Increased Electricity Demand Flexibility Enabled by Smart Grid: Impacts on Prices, Security of Supply and Revenues in Northern Europe

The challenges related to regulation and balancing of energy systems with a high share of renewable intermittent power are well known (e.g. Georgilakis (2008), Franco and Salza (2011), Perez-Arriaga and Batlle (2012)). Increased flexibility on the demand side, in the form of moving electricity consumption from peak to off-peak periods, is seen as one of the options for handling varying power generation from RE sources in future energy systems with high RE shares. Currently, however, this type of short-term flexibility on the demand side, i.e. a consumption pattern with less difference between off-peak and peak periods and that may adjust on an hourly basis to variations in supply, is limited. There are two main reasons for the current lack of demand flexibility: First, most consumers are not exposed to real-time pricing (RTP), implying that they have no incentives to move consumption to periods with low prices. Second, technical solutions for automatic adjustment of consumption are today limited, meaning that flexible- or smart- energy usage requires user’s action. Notwithstanding, there are reasons to expect that these obstacles may become less important in the future, due to technical development and restructuring of electricity markets. In this regard, it is of interest to analyze how a development towards more active use of demand side management will affect the power system in terms of need for peak power capacity, technology mix in electricity production, electricity prices and system costs