This paper explores the price setting of demand-side flexibility, modelled as consumers’ voluntary load reduction, in distribution grids. It develops a long-term equilibrium optimization model with a bi-level setting for voluntary demand-side flexibility. In the Upper Level (UL), the Distribution System Operator (DSO) maximizes welfare by deciding the level of network investments and setting the price for demand-side flexibility. The DSO also sets the distribution network tariff in order to recover the network investment and flexibility costs from the Lower Level (LL) consumers. LL’s active residential and commercial consumers react to network tariffs and to the price offered for their flexibility by investing in rooftop solar and batteries and offering a certain volume of demand-side flexibility when requested by the DSO. The passive residential consumers also provide flexibility by decreasing their load, but they do not invest in rooftop solar or batteries. We find that voluntary demand-side flexibility increases welfare and allows significant network investment savings. We also find that the benefits can reach all types of consumers. Besides, it is opportune to apply price differentiation when setting the price for demand-side flexibility, where applicable.
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New European rules are being developed to shape electricity market design in a way that improves TSO- DSO coordination, makes efficient use of distribution-connected resources, and empowers the smallest network [...]