Estimating the Benefits of the Gridwise Initiative: Phase I Report

By Walter S. Baer; Brent Fulton et al. | Go to book overview

Appendix A
Microeconomic Discussion of
GridWise-Enabled Demand Response

The GridWise concept has implications for both the efficiency of the electric power market and the welfare distribution among producer and consumer classes. In the following diagrams, consumers are end-users of electricity in the residential, commercial, and industrial sectors. The demand curve represents the horizontally aggregated demand of all end-users and for simplicity is shown as linear. The utility represents an entity that links the wholesale and retail markets, essentially selling to consumers at retail prices and purchasing electricity at the market-clearing price in the wholesale market. It can be a traditional utility, competitive electric service provider, or aggregator. Generators are producers of electric power who sell electricity into a competitive hourly wholesale market. It is assumed that the wholesale market operates in a way that dispatches generating units in order of marginal cost and the market clears at the marginal cost of the most expensive unit dispatched. The slope of the supply curve becomes very steep as more-expensive peak units are dispatched.


The Traditional Electric Power Market

In Figures A.1 and A.2, it is assumed that all end-users of electricity face the same time-invariant retail price set by a utility. The retail price does not reflect the wholesale market-clearing price at any particular time but is, rather, a price at which a utility expects to achieve an acceptable rate of return over the long run. The demand curve represents the end-users' willingness to pay for electricity and shifts throughout the day and the year. The quantity of electricity consumed in any bidding period is determined by the intersection of the aggregate demand curve and the retail price. However, the wholesale market faces a de facto inelastic short-run demand from the retail market, since consumers have no incentive to adjust their consumption due to price changes in the wholesale market. The market-clearing wholesale price (WP) is determined by the intersection of this inelastic demand curve seen by the wholesale market with the marginal cost (MC) curve of the electric power producers. Thus, the retail and

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Estimating the Benefits of the Gridwise Initiative: Phase I Report
Table of contents

Table of contents

  • Title Page *
  • Preface iii
  • Contents v
  • Figures vii
  • Tables ix
  • Summary xi
  • Acknowledgments xv
  • Acronyms and Abbreviations xvii
  • 1 - Introduction 1
  • 2 - A Framework for Assessing Gridwise Benefits 7
  • 3 - Phase I Estimates of Gridwise Benefits 12
  • 4 - Discussion 29
  • 5 - Plans for Phase II 35
  • Appendix A - Microeconomic Discussion of Gridwise-Enabled Demand Response 37
  • Appendix B - Baseline Projections, 2001–2005, Without Gridwise 43
  • Appendix C - Results and Input Variables, by Scenario 49
  • Appendix D - Estimates of Benefits for Nominal Scenario 51
  • References 55
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