Demand response in Indian electricity market

• Published in: Energy policy 2012-11, Vol.50, p.207-216
• Main Authors: Siddiqui, Md Zakaria, de Maere d'Aertrycke, Gauthier, Smeers, Yves
• Format: Article
• Language: English
• Subjects: Applied sciences; business enterprises; Cost; Costs; Cutting; Demand; Demand response; Developing countries; Economic data; Electric energy; Electric power; Electricity; Energy; Energy economics; Energy industry; Energy policy; Exact sciences and technology; General, economic and professional studies; India; Indian; Market prices; Marketing; Markets; Politicians; politics; Prices; Regulation; Regulators; retail marketing; Retail trade; Studies; Tariff; Tariffs; Trade liberalization; wholesale marketing
• ISSN: 0301-4215; 1873-6777
• DOI: 10.1016/j.enpol.2012.06.030

This paper outlines a methodology for implementing cost of service regulation in retail market for electricity in India when wholesale market is liberalised and operates through an hourly spot market. As in a developing country context political considerations make tariff levels more important than supply security, satisfying the earmarked level of demand takes a back seat. Retail market regulators are often forced by politicians to keep the retail tariff at suboptimal level. This imposes budget constraint on distribution companies to procure electricity that it requires to meet the earmarked level of demand. This is the way demand response is introduced in the system and has its impact on spot market prices. We model such a situation of not being able to serve the earmarked demand as disutility to the regulator which has to be minimised and we compute associated equilibrium. This results in systematic mechanism for cutting loads. We find that even a small cut in ability of the distribution companies to procure electricity from the spot market has profound impact on the prices in the spot market. ► Modelling the impact of retail tariff in different states on spot prices of electricity in India. ► Retail tariffs are usually fixed below appropriate levels by states due to political reasons. ► Due to revenue constraint distribution utility withdraws demand from spot market in peak hours. ► This adversely affects the scarcity rent of generators and subsequently future investment. ► We show possibility of strategic behaviour among state level regulators in setting retail tariff.