Utilities Policy 66 (2020) 101083

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Utilities Policy
journal homepage: http://www.elsevier.com/locate/jup

Demand response, market design and risk: A literature review

Joana Sousa a, *, Isabel Soares b
a
FEUP, University of Porto, Rua Dr. Roberto Frias, 4200-465, Portugal
b
CEFUP and FEP, University of Porto, Rua Dr. Roberto Frias, 4200-464, Portugal

A R T I C L E I N F O A B S T R A C T

Keywords: Different market designs may create distortions on spot pricing equilibrium, thus providing different signals for
Demand response market agents and investment decisions on new generation assets. Also, demand flexibility market value may
Electricity markets differ according to market characteristics. This paper aims to study the demand response (DR) – market design –
Market design
risk nexus. According to our findings, despite the design differences among MIBEL, EEX and Nord Pool, some
variables are common to all while those associated with risk premia might differ. This is due to the mismatch
between the specific market structure characteristics and premises, particularly in what concerns the supply
generation portfolio composition in the day-ahead markets.

1. Introduction
European countries have moved from regulated monopolies to
liberalized electricity markets organized as a sequence of overlapping
markets. Electricity features, namely, the lack of storability and
continuous variation on electricity demand during the day and across
seasons, imply generation to constantly adjust its output to match de­
mand requirements. The need for real-time balance between demand
and supply is a complex process. The development of electricity spot
markets is essential to a long-term efficiency competitive market,
because bilateral trading does not respond to volatility issue. The
development of electricity spot markets is key to long-term efficiency in
an increasingly complex real-time balance. According to economic
theory, under perfect competition, spot clearing prices may transmit
correct price signals for capacity investments and efficient risk alloca­
tion. Nevertheless, liberalized markets transparency measures introduce
distortions in market prices formation. According to Ockenfels et al.
(2008), most energy is traded in long-term contracts. Despite spot
market prices determine the costs of electricity in the long run, it is
reliable to focus the economic analysis on these prices. Wholesale
electricity spot markets are divided into day-ahead and intra-day mar­
kets and are mostly organized as a uniform price auction. Thus, all units
traded are bought or sold at the market clearing price, which is estab­
lished on the basis of the intersection of supply and demand in a
transparent and efficient dispatch.
According to the economic theory, generation bids equal marginal
costs and, under perfect competition, spot clearing prices may transmit
correct price signals for capacity investments and efficient risk alloca­
tion. Nevertheless, optimal market clearing prices formation may
diverge from marginal costs as they are subject to factors like demand
flexibility, price caps, and strict reliability standards. Bid caps (bids have
an upper limit and the market price cannot increase to above the
maximum bid) and price floor are common mechanisms in day-ahead
spot markets. Conejo and Sioshansi (2018), consider to be an example
of the disconnection between today’s market and system designs, that
many restructured electricity markets rely on day ahead and real-time
markets to coordinate electricity supply. The authors argue about
future market designs that consider an increasing transformation gen­
eration portfolio.
Market clearing price fluctuations caused by continuous demand
changes, induce generation to continuously adapt to these changes.
Generation portfolio is established based on market principles: during
demand peak periods, generation peaking units with high marginal costs
may recover both fixed and variable costs due to price rising. To opti­
mize demand and supply at any period, a diversified generation port­
folio is combined with the “merit order” rule. According to Federico
et al. (2008), baseload plants are used to meet baseload demand and
have high fixed costs and low marginal costs which is the case for nu­
clear, run-of-river hydro plants, and renewable capacity. Plants with
intermediate marginal and fixed costs often operate in intermediate
demand periods and include coal and CCGT plants. To meet demand
peaks, plants must have low fixed costs and high marginal costs and
include gas and/or oil turbines. Reservoir hydroelectric power and
pumped storage capacity are also used to meet demand peaks.

* Corresponding author.
E-mail address: up200903949@fe.up.pt (J. Sousa).

https://doi.org/10.1016/j.jup.2020.101083
Received 4 February 2020; Received in revised form 12 June 2020; Accepted 24 June 2020
Available online 10 July 2020
0957-1787/© 2020 Elsevier Ltd. All rights reserved.
J. Sousa and I. Soares
Nevertheless, the hydroelectric power reservoirs and pumped storage
capacity have dissimilar marginal and fixed costs than gas and oil tur­
bines. In fact, the hydroelectric plants with large reservoirs have a high
fixed cost and its marginal cost tend for zero. Whereas, the pumped
storage facilities could have a medium or high fixed cost and a variable
marginal cost tending to the lowest market prices. Therefore, for a given
generation merit order, the distribution of demand levels across a given
period of time will affect the distribution of electricity spot prices.
When demand increases flexibility, through curtailing or shifting
load consumption in periods of high prices, market equilibrium is
adjusted and clearing prices tend to decrease, thus reducing the need for
peaking generation capacity. Nevertheless, some authors sustain that
real-time prices may lead to higher costs so, differences between the
forecasted and the real demand will increase the volume traded on
balancing markets. This may be hampered with a more direct flexibility
control (Kühnlenz et al., 2018). DR has more potential to decrease
market clearing prices when peak generation portfolio is dominated by
coal and CCGT plants than peak generation portfolios dominated by
reservoir hydroelectric power with pumped storage capacity (Federico
et al., 2008). Demand flexibility minimizes generation capacity, thus
reducing the use of peaking units with low fixed costs and high marginal
costs and offsets peak load. Therefore, through demand flexibility, DR
may introduce elasticity in the market and a spot price reduction.
According with the economic theory principle, marginal spot pricing
equilibrium distortions may be created. Such distortions may provide
different signals for market participants for operation and investment in
new generation assets and in demand flexibility market value.
The main goal of this work is to investigate which is the nexus be­
tween market design and DR; moreover, which market design is more
suitable for incentive DR initiatives. There are several studies about DR
in electricity markets in the literature. However, few were focused on
the potentialities DR considering different electricity market designs.
Indeed, there is a lack of knowledge regarding the potentiality for DR in
different markets, namely, in what regards those with and without bid
cap and floor mechanism, such as EEX and MIBEL market designs. This
paper aims to identify in the existing literature, if there are variables
related to risk premia. To address this gap, we present a literature review
on DR - market design - risk nexus for three different EU electricity
markets – Nord Pool, Iberian market and Germany. This nexus seems
crucial for the full understanding of the electricity markets challenges
and possible solutions. This research contributes to knowledge by
tackling the following questions:
(i) Which drivers of energy prices in those markets are identified in
the literature? Are these common to all markets?
(ii) According to the literature, which market design - MIBEL, EEX or
Nord Pool-is more favourable to DR potential initiatives?
The results of the present research study led to the identification of
several variables associated with risk premia in the three markets -
MIBEL, EEX and Nord Pool. Seasonality and inconstant demand were
found to be common variables associated with risk premia on these
markets. This research results, contribute to improve the debate on DR
policy implications offering useful indications to policy makers for the
development of future energy market design structures.
This paper is organised as follows: after this introduction, Section II
presents an extended literature review, Section III - Methodology com­
prises a critical survey of the literature supporting the discussion on this
challenging topic. Section IV demonstrates the main results of this sur­
vey carried out by the authors. Finally, in Section V, the authors present
their conclusions and policy implications.
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Utilities Policy 66 (2020) 101083
2. Literature review
2.1. Demand response and market price equilibrium
Since the beginning of electricity markets deployment, electricity has
been seen by users as a commodity with few motivations for those with
flat tariffs to change their demand profiles. According to Kirschen
(2003) and Paterakis et al. (2017) electricity markets were established
based on the premise that short run price elasticity of demand is small,
due to electricity importance, convenience and low cost. Demand-price
elasticity concept comes from the microeconomic theory and reflects the
relative change in the demand with respect to the relative change in the
price. In other words, it suggests that consumers will increase their de­
mand up to the point where the marginal benefit they derive from
electricity is equal to the price they must pay (Mohajeryami et al., 2017).
Price elasticity may be defined as the responsiveness of quantity to
changes in price (Brunekreeft, 2004). Kirschen (2003) as well as Pinson
and Madsen (2014) sustain that only when existing a transfer from flat
tariffs to time varying prices exposition, consumers will consider taking
short run actions.
The interaction between buyers and sellers in a market, may be
described through the existence of an auction (Brunekreeft, G., 2004).
While buyer entities use traditional load forecasting tools in order to
predict demand behaviour and to present buying bids in the pool mar­
ket, selling entities present its selling bids. The buying and selling bids
are communicated to the market system operator for the day-ahead
(spot market). The selling bids are organized by market operator from
lowest price to highest price in an ascending order for each period,
corresponding to the blue aggregated curve represented in Fig. 1. The
buying bids are organized by market operator from highest price to
lowest price, in a descending order for each time-frame, corresponding
to the green aggregated curve represented in Fig. 1. They are analysed as
aggregated supply curve (upward) and demand curve (downward).
Market equilibrium is achieved through the interaction between the
demand and the supply curves and corresponds to the market clearing
price. This price corresponds to the crossing point between the two
curves and it is the point where the marginal benefit of demand equals
the supply marginal revenue. The asymmetry of the market and the
absence of demand bidding means that, only generation entities present
its bids on an asymmetric pool and demand side is being fit to pay any
price to be supplied. In this scenario, market equilibrium is achieved
with the interaction between the demand and the supply curve, and
point B corresponds to the market clearing price. On a single-sided
market with passive, inelastic demand, market clearing prices tend to
increase when compared with a double-sided market or market were
both demand and supply bid (European Commission, 2013). By bidding
higher prices, suppliers may move the selling curve upwards and raise
the market clearing prices to obtain a larger amount of profits.
Nevertheless, by encouraging DR, market equilibrium is adjusted to
Fig. 1. The benefits of DR on wholesale market prices (Braithwait et al., 2006).
J. Sousa and I. Soares
demand curve and prices will not increase so rapidly (Goswami and
Kreith, 2007). On a double-sided market with active, elastic demand, the
market equilibrium is achieved at point E. Rather than being fixed at a
specific load level, if demand side curtail or shift load consumption in
periods of high prices, in response to dynamic prices from system
operator, their load reductions will allow to move the selling curve
downwards. This may allow to set the market clearing prices at lower
prices. Spot prices varying patterns, provide an opportunity for different
DR customers. It is possible to save electricity costs through reschedul­
ing electricity consumption, including industrial loads storage-type
profiles (Daryanian et al., 1989).
The benefit effect from DR action on wholesale market spot price -
reduction from point B to point E is illustrated in Fig. 1. These
financial and cost-saving DR benefits represented in Fig. 1 are both for
active consumers – in orange – and for generation companies – in blue.
The first may involve a reduction of the price electricity bill, while the
cost-saving DR benefits for generation companies are translated by a
reduction in new generation technology investments and in a system
optimization.
In accordance with Directive 2009/72/EC on the common rules for
the internal market recast, all customer groups (industrial, commercial
and households) should be encouraged to have an active participation
role in energy markets to trade their flexibility and self-generated
electricity (EU, 2009). The Commission identifies an “active con­
sumer” in the proposal on the internal market for electricity (recast)
COM/2016/0864 final/2–2016/0380 (COD) as: “customer or a group of
jointly acting customers who consume, store or sell electricity generated
on their premises, including through aggregators, or participate in DR or
energy efficiency schemes provided that these activities do not consti­
tute their primary commercial or professional activity” (EU, 2016).
Through demand bidding or buyback programs, active consumers and
industries with the capacity to respond to system signals, in order to
curtailing their energy demand or shifting specified loads in exchange
for an incentive or reward, are allowed to participate directly or indi­
rectly in energy markets. PJM, ISO New England, the New York ISO, and
the California ISO are some examples of demand bidding programs that
have been offered to consumers (Shariatzadeh et al., 2015).
While large consumers may directly bid on energy markets, small
consumers can participate through third-party aggregators to bid load
into day-ahead, intraday wholesale energy markets or capacity reserve
markets (Paterakis et al., 2017). Consumers, through aggregators ser­
vices, are offered a fixed discount or incentive payment in return for
curtailing load during an emergency or during high-cost period ac­
cording with operator requirements. When consumers, through aggre­
gators, participate on a pool DR mechanism, they are directly competing
with supply companies in the wholesale, balancing and ancillary ser­
vices markets (Bertoldi et al., 2016). An increasing competition on the
supply side, is expected to induce suppliers to bid at lower prices,
moving the selling curve downwards and decreasing the market clearing
prices.
Currently, consumers have no incentive to respond to changing
market prices, thus they are not aware of real-time price signals. For the
proposal recast of the Electricity Directive: “All consumers should be
able to benefit from directly participating in the market, in particular by
adjusting their consumption according to market signals and in return
benefit from lower electricity prices or other incentive payments”. The
benefits of this active participation are likely to increase over time, both
with an increase of RES-I share on energy markets and when electric
vehicles, heat pumps and other flexible loads become more competitive.
Flexible loads are projected to continue increasing, this may trigger
changes on market structures and on the operation of the system to
adapt to this new reality and characteristics.
Despite DR promising future, significant barriers still remain. Before
DR resources may contribute, in a significant way, to system operation
and to a redraw of market design, overcoming boundaries between
wholesale and retail markets must be accomplished. An European
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Utilities Policy 66 (2020) 101083
energy market well-functioning as a whole, with harmonized rules
across countries rather than dispersed regulations, is the key for the
development of a new market design with price signals communication
to consumers and to DR resources contribution.
2.2. Energy-only market design and future perspectives
Electricity market design restructuring dates back to 1980’s and it
was initially adopted as an energy-only design, when electric power
systems architecture essentially relied on dispatchable thermal genera­
tion and predictable, largely inflexible loads. Despite the evolution of
market design over the past three decades, due to a number of changes in
electric power systems architecture, future electricity markets are ex­
pected to face even more major challenges. These challenges are
enumerated by Cramton (2017), and they are associated with the
transmission grid and generation physical constraints, the volatility -
both of demand and supply-particularly regarding renewable generation
and the need for their permanent balance.
Future electric power systems architecture is expected to complicate
system operation and market design. Thus, renewable generation high
shares - frequently with zero or limited marginal costs supported by
financial schemes - and distributed generation, distributed energy stor­
age and increasing electrification, will contribute to economic uncer­
tainty. Therefore, as a consequence of renewable generation rapid
growth, incentives for new investments in generation assets will be
reduced due to downward pressure on electricity wholesale market
prices. Simultaneously, market price volatility is expected to increase.
Therefore, future market prices will rely more on uncertain weather
conditions and variable real-time availability. Nevertheless, and despite
the increasing renewable generation capacity, to meet the European
Union (EU) renewables goals, the transition to a low-carbon power
generation system will bring challenges and possible underinvestment,
namely in traditional backup capacity which is necessary for a system
under scarcity events (Liebensteiner and Wrienz, 2019). The conclusions
of a study performed by Tucki et al. (2019) reveal that a drastic change
in Poland generation portfolio is not expected, and economic signals for
investments in the generation sector will go mainly to conventional
power plants and to gas-fired power plants, together with a significant
increase of DR.
Energy market design seeks to provide short-run efficiency achieved
through optimized unit commitment and real-time dispatch. Theoreti­
cally, in a well-designed energy-only market design, according to eco­
nomic theory, if there are no market distortions, marginal spot pricing
indicates the best equilibrium solution, sending the correct signals for
market participants about prices and resource availability in order to
provide incentives for operation and investment. Marginal cost pricing
would cover power plants investment and operating costs, as long as the
price is set equal to value of lost load (VOLL). According with the Eu­
ropean Union Electricity Market Glossary, VOLL is considered to be the
value attributed by consumers to unsupplied energy. Theoretically, it
represents the maximum willingness to pay for electricity, which, at that
price, consumers will be indifferent between paying and being supplied,
and not paying and not being supplied (European Union Electricity
Market Glossary, 2020).
Notwithstanding, power plants receive incentives set at the marginal
cost of the most expensive plant (marginal plant), to supply at variable
costs. At peak hours, prices need to rise to allow these to recover their
fixed costs and can theoretically reach the maximum willingness to pay
for electricity. Indeed, most of the generation capacity operate within
energy-only market design and generation expansion decisions are
based on market signals, both energy and reserves markets to recover
costs, being heavily penalized if not available in periods of high prices
and scarcity rents. Ockenfels et al. (2008) defend that, in perfect
competition, capacity bottlenecks are necessary to create investment
incentives. In non-perfect competition, investment incentives are
created by regulators, such as price caps to limit the market prices.
J. Sousa and I. Soares
Nevertheless, incentives introduction may lead to peak generators
profits reduction and to a disinvestment in these units. High production
costs are associated with several factors, such as capacity shortages, high
demand, environmental policy interventions, market structure and
regulations that introduce non-perfect competition and market pricing
distortions. Consumers protection from market power or speculation
opportunities and high energy prices take regulators to set price caps
below the VOLL. On the contrary, under perfect competition environ­
ment, price caps should be set above VOLL to avoid impair market ef­
ficiency, decreasing generators profit and leading to a lack of investment
in peaking thermal units causing the missing money problem. This refers
to the inability of competitive wholesale electricity markets, to transmit
correct energy prices, in order to perform new investments for a reliable
performance of the electric service Hogan (2017). The missing money
problem, can also be seen as the not recovered values necessary to keep
optimum generation portfolio on wholesale electricity markets. Future
energy market generation mix with continuous increasing of variable
renewable energy (VRE) will accentuate the missing money problem as
illustrated in Fig. 2. According to Peng and Poudineh (2019) recent
European regulations foresee wholesale market imbalances but the
distortive effect of generation-based subsidy, such as the missing money,
is still neglected.
In the same way, also demand flexibility resources will tend to
reduce market clearing prices increasing the missing money problem.
Currently, market mechanisms and low wholesale markets prices may
not be sufficient to send correct scarcity and price signals to trigger new
generation investments. Some authors evoke the establishment of ca­
pacity remuneration mechanisms as a complement to electricity trading
on the power exchange (Gugler et al., 2016.). In some restructured
electricity markets, day-ahead and real-time markets are complemented
by capacity markets payments, in order to overcome the missing money
problem. Ockenfels et al. (2008), states that “capacity markets can be
designed as derivatives markets for physical capacity in which the de­
manders or regulators purchase capacity or buy such at auction in
proportion to the expected demand in the future so that the expected
system peak load is (more than) covered.”. In Europe, several countries
such as France, Great Britain, Italy and Poland, in addition to power
mechanisms, created a dual market with a capacity market segment
(Tucki et al., 2019). Despite the acknowledged relevance of DR to future
electrical power systems challenges, such as stochastic renewable gen­
eration integration, increasing electrification and a decreasing share of
fossil fuels as primary-energy sources, EU has no DR harmonized policy
Fig. 2. The relation between missing money, spot prices volatility and generation mix investment signals (from the authors).
4
Utilities Policy 66 (2020) 101083
or DR EU-wide implemented programs (Torriti et al., 2010), Vall�es et al.
(2016) and Annala et al. (2018). Conejo and Sioshansi (2018), argue
that future electricity market design, will play the following two roles:
(i) hedging against price volatility and (ii) capacity planning and in­
vestment. However, if capacity is sufficient and wholesale prices signals
are satisfactory for efficient investments, capacity remuneration mech­
anisms become superfluous. The explicit capacity mechanisms are
resumed in Table 1, that includes a general description on its main ad­
vantages and disadvantages.
According to Botterud and Auer (2018), explicit capacity mecha­
nisms can be classified into quantity-based and price-based instruments
(Table 1). The first can be divided into strategic reserves, capacity
markets and capacity obligations, while the price-based instruments
concerns capacity payments.
2.3. Market design and market integration
For Gugler et al. (2018), market integration is a policy instrument for
markets with increasing shares of renewable electricity generation,
needed for balancing volatility, while assuring network stability through
trade. Through an econometric approach integrating 25 European
day-ahead electricity spot markets, these authors found that there is
large potential for a European continuous integration improvement,
namely through capacity investments and further promotion of market
coupling. Meanwhile, European electricity markets integration gathers
the employment of different technology mixes to meet the demand in
each hour with impact in neighbouring countries. Individual country
decisions on their technology mixes, may cause an impact of generation
portfolios of other member states, and create institutional barriers as
well as distortions, such as market hampering competition (Gugler and
Haxhimusa, 2016; Gugler and Haxhimusa, 2019). When studying the
impact of two German energy reforms, Grossi et al. (2018) conclude that
unilateral policy reforms have a direct impact, both on investment de­
cisions and on prices, in neighbouring countries. Thus, the nuclear
phase-out caused prices to increase of up to 25% in neighbouring
countries whilst the renewable energy support schemes caused a price
decrease of 0.16%. Also, Houllier (2014), when studying the implica­
tions of Germany’s nuclear phase out on the integration of EU’s elec­
tricity market, concluded that the German market decoupled from the
other markets and price volatility transmission increased.
In Europe, both price/cost-driven instruments and quantity-driven
instruments are direct financial support schemes for renewable
J. Sousa and I. Soares Utilities Policy 66 (2020) 101083

Table 1
Explicit capacity mechanisms. An adaptation of Botterud and Auer (2018).
Description Advantages Disadvantages

Quantity- Strategic Generators that guarantee regulated amounts of
based Reserves installed and ready to use peak generation capacity.
Operate outside the regular market. The TSO
purchases and manages the strategic reserves under
predefined rules.
Capacity Centralized auctions for capacity where load
Markets serving entities can purchase capacity to meet their
capacity margin requirements, as determined by an
independent entity as the system operator or a
regulatory authority. The system demand for
capacity in the auction is determined to meet
certain reliability targets.
Capacity This instrument guarantees that a regulated
Obligations generation adequacy target for the system is
determined by assigning capacity obligations to
individual load serving entities. However, in this
case there is no centralized capacity market, and
capacity is rather obtained through self-supply or
bilateral contracts with generators.
Price- Capacity A capacity payment is a price-based mechanism
based Payments that provides an extra remuneration to individual
generators for guaranteeing adequate generation.
This could discourage retirement of old generation
capacity and incentivize investments in new
capacity.
þ High level of control for the system - The substantial intervention into the electricity
operator generation. market.
þ Capacity that is kept in service to meet
reliability purposes in the future.
þ A targeted reliability/capacity level is - Uncertain revenues for generators.
reached with a high level of confidence. - A large and complex set of administratively
þ Limited market intervention. determined parameters determine the demand for
capacity, which is critical for the capacity price
formation.
þ Can be implemented as centralized or - High degree of centralized planning.
decentralized solutions and they can
easily consider contributions from DR
and energy storage.
þ Capacity that is prevented from
retirement to meet reliability purposes
in the future.
þ Stabilizes volatile revenues of - Has limited precision, meaning that it may not
generators on the wholesale electricity achieve the desired reliability and capacity levels.
market. - Generators may be financially over-or
þ Reduces the wholesale electricity undercompensated, which can easily lead to an
market price level due to extra firm inefficient outcome.
capacity available.

electricity generation. According to Botterud and Auer (2018), green 3. Methodology

certificates, feed-in tariffs, feed-in premium and tender/auction schemes
are the most common support schemes. The increasing
cost-competitiveness of renewable generation technologies, when
compared to traditional generation, is changing the electric power sys­
tems paradigm. Nevertheless, a number of negative impacts from
increasing penetration of renewables, such as continuously low whole­
sale electricity market prices, the duck-curve effect and increasing
electricity generators profitability risks, led to the need of new market
design solutions to maintain system reliability (Liebensteiner and
Wrienz, 2019). A number of drivers such as, decreasing natural gas
prices, low electricity demand triggered by the financial crises in 2008
and low or missing carbon prices, were also identified to decline
wholesale electricity prices (Botterud and Auer, 2018). According to the
same authors, the two main reasons pointed out for negative prices
phenomena is renewable electricity generation preferential treatment
and subsidization as well as the operational constraints and start-up
costs that prevent traditional thermal generators from reducing out­
puts besides prices go below their marginal costs. Generation supply
excess may set the market clearing price at negative prices. Moreover,
the preferential treatment and subsidization of renewable electricity
generation increases variability in net load and may lead to negative
prices due to remain generation mix inflexibility. Minimum spot prices
tend to overlap with minimum conventional generation production
periods, and during 2018 about 134 h’ day ahead electricity prices were
set at negative prices. Moreover, during these periods, large quantities of
RES integrated the market reducing day ahead electricity prices. The
increasing renewable generation penetration and the continuing elec­
trification from industry, transport, and heating sectors, together with
digitalization and greater decentralization from generation resources,
will increase future power system operational challenges (ENTSOE-E,
2019). Nevertheless, an opportunity for the sector may arise if
short-term market design ensures an efficient management of the un­
certain electricity generation outputs, bringing together the market
outcomes and the physical grid limitations. The increasing RES to
wholesale price signals and facilitating participation of consumers and
storage resources to all electricity markets will further improve liquidity
and market efficiency.
3.1. Introduction
The methodology was developed, in order to answer to the two
research questions. The selection of different energy market design
characteristics such as market mechanisms, supply proprieties or RES-I
prospects set the mote to choose and analyse three different energy
markets as represented in Fig. 3.
The literature review focused on risk premia in these markets was
performed and a certain number of variables was identified. These
variables possible impacts on DR implementation on energy markets
was also analysed.
3.2. MIBEL market model
MIBEL operation of the electricity wholesale market was launched on
July 1, 2007, it is divided into the Market Operator and the System
Operator and involves different contract types that are complementary
to each other, in order to guarantee the perfect equilibrium in real-time
between production and consumption (Feio, 2014). The electricity
wholesale market is composed by several economic transactions
(Pacheco, 2010), namely:
� A derivative market managed by the Portuguese operator (OMIP),
where future electricity production and buying commitments are
established.
� A spot market managed by Operador del Mercado Ib�erico de Energía
- Polo Espan~ ol, S.A. (OMEL), that includes both a day-ahead market
in which demand and supply schedules are established for the
following day and an intraday market for a daily adjustment
component.
� Ancillary services market to maintain real-time equilibrium between
electricity production and consumption.
� A bilateral trading market, in which both selling and buying agents
may set arrangements considering different time horizons.
The spot market auction design relies on the energy-only market,
where the marginal spot pricing is set at market equilibrium for all daily
market participants, that includes all generation units and consumption,

5
J. Sousa and I. Soares Utilities Policy 66 (2020) 101083

resulting in a single price for the entire Iberian system. An exception significantly in the increasing of RES shares participation. On both
procedure may exist, when congestion management occurs in the in­ markets the non-renewable sources shares decreasing trend will be
terconnections between Spain and Portugal. accentuated with time.
Day-ahead market handle electricity transactions for the next day
through the submission of electricity sale and purchase bids, while intra- 3.3. EEX market model
day market consists of six sessions held over 24 h period. This market
can be attended by all agents who have participated in the daily market EEX is one of the most important power exchange platforms. In terms
to adjust their program resulting from the day-ahead market, according of volumes exchanged in continental Europe for both spot and future
to the needs they expect in real time, through the submission of offers of products from 2002 to 2007, spot volumes traded have almost quadru­
sale and acquisition of energy (Pacheco, 2010). pled from 31.456 GWh to 117.322 (Rademaekers et al., 2008). There are
Both in day-ahead market and intra-day market, electricity buying more than 140 companies trading on EEX spot market (EEX, 2020). EEX
and selling bids submitted to the market operator can be simple or offers a wide range of power products, such as day ahead and intraday
complex. While simple bids express a price and an amount of energy, and derivatives.
complex bids incorporate complex conditions including technical or In the last three years, German generation renewable energy gen­
economic conditions, such as indivisibility, load gradients, minimum eration portfolio have been gradually increasing (representing in 2019
income, scheduled stop. about 46.9%), despite the largest percentage of generation for electricity
Both countries, Spain and Portugal, tend to have similar climactic production comes from non-renewable sources. Power plants using coal
conditions. Notwithstanding, Spain generation assets by technology in (brown and hard coal) represent the major contribution for the energy
the wholesale market participation is more diversified than Portuguese mix. Nevertheless, along the consecutive years this importance is being
generation portfolio. Hydro power shares are significative in both offset by the continuous integration and increase share of renewables
countries, but this is particularly true for the Portuguese reality. During generation, particularly of wind and solar energy (Table 4). The
dry years, electricity generation resources based on fossil fuels tend to continuing integration of renewable energy associated with generation
increase their share and as consequence both electricity prices and specificities, such as intermittency and daily ramping increase and
electricity generation emissions tend to increase. In 2019, the generation decrease, will increase energy market future challenges. In 2019,
portfolio included wind (20.2%), solar photovoltaic (3.4%), thermal renewable energy corresponded to 46.5% of total electricity generation
solar (2.0%), nuclear (21.2%), thermal coal (4.1%) and fuel/gas power in Germany. Moreover, about 22% of the energy mix supplied to EPEX
plants (19.3%), large hydro (7.4%) and cogeneration, waste and mini spot largest market was from renewable sources and this percentage is
hydro (15.7%) (OMIE, 2020). expected to continuing increasing to 35% by 2020 reaching 80% by
Despite the generation assets in the wholesale market are the same, 2050 (IRENA, 2015). The German generation mix is quite diversified, in
during 2019 fossil fuel thermal power plants particularly thermal coal
(4.1%) decreased significantly its shares but per other side fuel/gas Table 2
power plants (19.3%) shares participation increased substantially when Energy per energy source (%) – Spain (OMIE, 2020).
comparing with the previous year (Table 2). 2019 2018 2017 2016 2015
Portugal generation assets by technology in the wholesale market
Coal 4.1 13,1 15,9 13,0 19,1
participation, in 2019, included wind (24.2%), solar photovoltaic
Combined cycle 19.3 9,7 12,6 9,3 9,1
(19%), thermal coal (9.4%) and fuel/gas power plants (20.7%), large Import 6.7 8,0 8,4 7,6 4,4
hydro (15.7%) and special regime (15.6%) (OMIE, 2020). Nuclear 21.2 19,9 20,5 21,0 20,8
As a direct consequence of a more reduced generation portfolio in Hydro Power 7.4 10,3 5,5 12,0 9,2
Portugal, the impact of non-renewable electricity generation on elec­ Wind 20.2 18,7 17,8 18,0 18,4
Solar Photovoltaic 3.4 2,8 3,0 2,8 3,0
tricity prices tends to be more significant, thus the country gets more Thermal solar 2.0 1,8 2,1 2,0 2,1
dependent of fuel prices such as coal, natural gas and fuel oil. Never­ Cogeneration. waste and mini hydro 15.7 15,8 14,2 14,3 13,9
theless, this scenario has been changing and in 2019 thermal coal share
Source: OMIE, 2020.
achieve it lowest value (Table 3). Both Portugal and Spain invested

Fig. 3. Research Design Sequential Stages (from the authors).

6
J. Sousa and I. Soares Utilities Policy 66 (2020) 101083

2019, generation assets by energy source included wind (24.4%), solar Table 4
(9.0%), brown coal or lignite (19.6%), hard coal (9.5%), nuclear Energy per energy source (%) – Germany (Fraunhofer, 2020).
(13.7%), oil and gas (10.2%), hydro (3.8%) and biomass (8.7%) 2019 2018 2017 2016 2015
(Fraunhofer, 2020).
Brown Coal 19.6 24.0 24.3 24.5 25.3
The vast deployment of volatile RES in Germany, through the sub­ Hard Coal 9.5 13.2 14.8 18.1 19.3
sidization of wind and solar technologies (wind generation represented Gas 10.2 8.2 8.9 8.5 5.5
the second strongest source of energy in 2018) imply certain conse­ Uranium 13.7 13.2 13.1 14.6 15.8
quences for resource adequacy, namely, in conventional generation Hydro Power 3.8 3.6 3.7 3.8 3.5
Biomass 8.7 8.2 8.1 8.2 8.1
technologies curtailing, particularly in gas-fired plants (Liebensteiner Wind 24.4 20.4 19.1 14.5 14.7
and Wrienz, 2019). A net reduction of 9.1 TWh in electricity generation Solar 9.0 8.4 7.2 7.0 7.1
from gas-fired plants in 2018, related to other fossil-fuels electricity
Source: Fraunhofer (2020).
generation reduction, in the long run, will result in missing dispatchable
electricity generation and increase the missing money problem
(Fraunhofer ISE, 2019). price contract or market price contract, but cannot choose a supplier
from another country.
Electricity demand is expected to continuing increasing at an average
3.4. Nord Pool market model
0.5% rate per year (AleaSoft, 2020). The future energy mix will account
with more renewable capacity that will compensate the reducing fossil
In the Nordic market, the system price is calculated based the on the
fuels production. Sweden, Finland and Denmark and Estonia are the
spot price market auction design. In the Nord Pool markets, the power is
countries that use more fossil-fuels and its total elimination is not
traded for delivery each hour the next day in an auction. The equilib­
perceived in a near horizon. When focusing renewable energy in the
rium on sale and purchase will set the prices reference price for trading
future energy mix, Norway intends to increase its hydro power capacity
and clearing of most financial contracts. Nevertheless, when there are
significantly in the future. While solar energy is not expected to increase
transmission or capacity constraints and power flow congestions be­
significantly, wind energy is expected to increase the renewable ca­
tween bidding areas, conditions are reflected in different regional price.
pacity. When focusing nuclear technology, there are quite different
Therefore, different area prices are established. The local TSO decides
approaches. While Finland intends to double its nuclear capacity, Swe­
which bidding areas the country is divided. These may vary, but
den plans to shut down all its power stations by 2050 (AleaSoft, 2020).
currently are five: Eastern Denmark, Western Denmark, Finland,
Estonia, Lithuania and Latvia constitute one bidding area each and
3.5. MIBEL, EEX and Nord Pool market model comparison
Sweden was divided into four bidding areas in 2011 (Nord Pool, 2020).
Nord Pool markets customers are typically power producers, sup­
Two competing market models have been established in the design of
pliers and traders. Large end-users also trade on the markets and buy
liberalized electricity markets - the pool model and the power exchange
power directly through Nord Pool, rather than through a supplier. There
model - as a way to introduce competition in the sector and organize the
are more than 370 companies responsible for power production, 500
relations between generation, distribution and consumers (Ockenfels
distribution companies and around 380 companies supplying end-users
et al., 2008). This includes major competitive markets such as the Eu­
in the Nordic and Baltic countries (Nord Pool, 2020). When analysing
ropean Energy Exchange - EEX (Austria, Deutschland and Switzerland),
the energy markets supply generation portfolio, in a year with normal
the Iberian electricity market - MIBEL (Spain and Portugal) and Nord
climatic conditions, hydro power accounts for half of the Nordic coun­
Pool (Norway, Sweden, Finland and Denmark).
tries’ electricity demand, specifically 53% in 2018 (AleaSoft, 2020).
Electricity wholesale market is composed by different economic
Despite renewable energy technologies represented, in 2018, about 62%
transactions that are complementary to each other, so that to assure the
of the total energy produced, nuclear energy production accounted for
perfect equilibrium in real-time between production and consumption.
21% of all electricity generated. Thermal production with gas, coal and
Nevertheless, the economic analysis based on spot prices, are considered
fuel-oil, represented 8.8% and wind energy represented about 9.8% of
to be reliable thus these prices set the costs of electricity in the long run
total share, in 2018 (AleaSoft, 2020).
(Ockenfels et al., 2008). In these three energy markets there is a central
Nord Pool lower market prices are related to this large part of the
spot market auction for setting a market clearing price and intraday
production related to renewable - particularly hydro power- and nuclear
trading, subsequent to the central day ahead auction. The spot market
technologies, which are low variable technologies. If, per one side,
auction design, relies on the energy-only market where the marginal
hydro power marginal costs tend to zero, during dry years Nordic
spot pricing is set at market equilibrium for all daily market participants,
countries become more dependent on the import of power from other
that includes all generation units and consumption, resulting in a single
countries such as Russia, Estonia, Netherlands, Poland and Germany or
price for the entire system. Both in Nord Pool and OMEL, an exception
in the use of energy sources with a higher production cost. It is possible
occurs when “market splitting” procedure is activated running different
for large consumers, to trade directly on the Nord Pool rather than
prices formation. There are differences in the MIBEL spot market func­
through a supplier, usually this one resells power to small and medium-
tioning compared to other market models, such as:
sized companies and households end-users. Each end-user may choose
their supplier and different power contracts possibilities, such as fixed
(i) Participation in trading on OMEL/OMIE is, in general, voluntary;
(ii) Congestion of the transmission system problems are resolved
Table 3 after the day ahead spot market by re-dispatch, but it is not
Energy per energy source (%) – Portugal (OMIE, 2020).
considered as spot market;
2019 2018 2017 2016 2015 (iii) Transmission capacities to neighbourhood countries are not
Coal 9.4 19.7 24.1 20.6 26.7 considered in trading on spot markets, being solved through
Combined cycle 20.7 23.4 17.4 12.5 9.9 market splitting;
Import 12.5 5.0 5.1 3.2 8.5 (iv) Bids for individual hours and blocks, may have further specifi­
Hydro Power 15.7 20.6 11.2 25.9 16.3
cations such as indivisibilities and minimum returns, load gra­
Wind 24.2 21.2 20.7 21.2 21.2
Solar photovoltaic 1.9 1.4 1.5 1.4 1.4 dients and planned maintenance times;
Special regime production 15.6 14.7 14.0 15.2 16.0

Source: OMIE, 2020.

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J. Sousa and I. Soares Utilities Policy 66 (2020) 101083

Table 5
Risk premia literature review on MIBEL, EEX and Nord Pool wholesale energy markets.
Reference MIBEL EEX Nord Main Conclusions
Pool

Viehmann (2019) ☑ This study found that energy traders behave rationally like risk- averse-agents. A relation between risk premiums and the
tightness of the system was demonstrated. Moreover, this study associates negative prices to a left-skewed price
distribution and larger negative premiums.
Valitov (2019) ☑ With the aim of analysing the impact of negative prices on risk premia, using the same methodology used by Viehmann
(2011), confirmed the presence of risk premia in the German day-ahead electricity market.
Ferreira and Sebasti~ao ☑ When studying the relationship between the electricity spot and futures prices, the risk premium was found to be mostly
(2017) negative. This study also indicates risk premium volatility seasonality.
Ballester et al. (2016) ☑ The relationship between prices, namely futures, spot and over the counter (OTC) forward markets were analysed.
Conclusions found a bidirectional causality from futures and OTC forward prices to spot prices meaning that there is not a
price relationship between them.
Cartea and Villaplana ☑ ☑ With the aim of founding a linear dependence between ex-post risk premiums of the electricity markets of Germany,
(2014) France and Spain, a positive correlation between electricity risk premia in these three countries and risk premia for natural
gas futures prices was found.
A. G. Hoff and ☑ This study concluded that the average spot price, deviation in inflow and variance of the spot price for the contract closest
Mortensen (2014) to delivery have positive influence on the risk premium. A seasonal variation was identified.
Weron and Zator (2014) ☑ This study performed an ex-post risk premia and convenience yields and found a positive impact of water reservoir
seasonal levels in the risk premium at the Nord Pool electricity market. This study supports a more general view that
shortage or high prices of “fuels” such as goods used for generating electricity lead to lower risk premia.
Viehmann (2011) ☑ In this study have been found participants have risk-averse behaviour and willing to pay significant negative risk premia in
periods of low demand and positive risk premia during peak hours.
Lucia and Torr�
o (2011) ☑ When studying the empirical relationship between electricity spot and futures prices, a dynamic risk premium was verified
with significant positive risk premiums in short-term electricity futures prices. Moreover, the study results demonstrate
that spot prices becomes positively skewed, when demand is higher than capacity or during inconstant demand period.
Botterud et al. (2010) ☑ A significant relationship between risk premium and information on reservoir, inflow and electricity consumption and
spot prices were associated with hydrological conditions and to CO2 prices was found.
Furi�
o and Meneu (2010) ☑ When analysing how the risk in spot price formation induces a counteracting premium in the contract prices, the risk
premium is found to depend on both the unexpected variations in demand and in the hydroelectric capacity. Moreover, the
forward premium turned out to be negatively related to the variance of spot prices.
Pietz (2009) ☑ This study analysed the futures from an ex post perspective and find evidence for significant positive risk premia at the
short-end. Moreover, it was verified the existence of seasonality in the risk premia.
Herr�
aiz and Monroy ☑ ☑ Market efficiency is analysed for European power markets. The study concludes for the presence of a risk premium in all
(2009) markets and thus reject the hypothesis of market efficiency. Average risk premia have been positive in power and natural
gas but negative in oil and coal markets.

(v) Intraday markets are organized into six sessions instead of
continuous trading only, originating coordination failure and
forecast errors opportunities;
(vi) Bid floor and price caps are inexistent mechanisms.
The absence of bid floor and price caps mechanisms as well as the
inexistence of negative spot prices is possibly the most remarkable dif­
ference between MIBEL and EEX and Nord Pool. Nevertheless, according
to Ockenfels et al. (2008), the most meaningful differences from other
markets is associated with control elements that are incompatible with
competitive pricing. This is due to deviations from pricing at marginal
costs and non-competitive elements in paying the generating companies,
together with a number of special provisions & side and additional
payments, such as capacity payments to suppliers or the Competition
Transition Costs. Electricity risk premia is considered to be a payment
for the risk of spikes in electricity spot prices and for the instability,
therefore a negative risk premium means that market agents are willing
to pay in order to reduce their exposure to electricity prices volatility.
These spikes are attributed both to a reduced number of market players
and to the non-storable nature of electricity, correspond to extreme
fluctuations on spot prices caused by the inability to predict high elec­
tricity demand periods. The most significant promise related to DR is an
increase of wholesale market efficiency, due to price spikes reduction
caused by consumer’s elasticity increase. Considering the market design
differences among these three energy markets, the literature review
performed this paper, focused on risk premia in order to determine if the
variables with impact on risk premia were associated with a particular
market design.
4. Results and discussion
Table 5 summarizes the main results of the survey performed under a
risk premium criterion:
There are some identified variables that are commonly related to
MIBEL, EEX and Nord Pool risk premia: seasonality and demand
unpredictability. Electricity characteristics, namely, the non-storability
and the need for real time synchronization with demand within an
increasing RES-I stochastic integration, lead to a predictable association
of these variables to risk. Despite some of the research performed study’s
conclusions associate seasonality and demand to risk premia, these two
variables seem to be associated with each other. High demand periods
occur during specific hours of the day associated with society daily’s
routine but also during some specific months or times of the year with
extreme temperatures, such as winter or summer. It is expected that,
during these stages, some short periods of high demand solicitations
may occur. Thus, it is expectable and predictable that with future
extreme climatic phenomena occurrences, seasonality association to risk
premia will continue and eventually, it might increase in time. The cli­
matic conditions along the year, also modify the composition of supply
in the day-ahead market by generation technology with impact both on
market clearance prices and risk. Nevertheless, according with some of
the proclaimed benefits of DR integration in energy markets, it could be
seen not only as load peak-shaving mechanism during load-shifting or
curtailing processes, but also could be seen as reserve mechanism.
Due to EU environmental regulations and economy decarbonization
targets, in all these electricity markets renewable generation has been
increasing and it is expected to continue in the near future. The
increasing participation of RES – I in the market share will increase
prices volatility due to its stochastics characteristics (Nicolosi and
Fürsch, 2009). RES – I nature, together with changes on supply in the
day-ahead market caused by generation technology climatic seasonality,
will remain on time and will contribute for market adaptations to
accommodate to these new characteristics. By 2050, the renewable en­
ergy supplied to EPEX spot is expected to represent 80% of total supply

8
J. Sousa and I. Soares
(IRENA, 2015). Nevertheless, and despite renewable generation ad­
vantages, their continuous integration in energy wholesale markets will
continue to increase risk for market-agents if the current market design
is not adjusted. Then, the integration of DR in energy markets could be
seen as a positive factor, in order to potentiate and optimize the use of
RES-I loads. Moreover, the continuous integration of RES on energy
markets is associated with a decrease on the clearing market prices. A
study performed on the EEX market, in 2018, indicates that in Germany
wind and solar power reduces the day ahead spot market price by 0.94
Euro/MWh and 0.43 Euro/MWh per GW, respectively (Fraunhofer ISE,
2019). Moreover, this supply excess may set at negative prices the
market clearing price and remain generation mix inflexibility start-up
costs that prevent traditional thermal generators from reducing out­
puts besides prices go below their marginal costs. Some research studies,
namely Valitov (2019) and Viehmann (2019), identify associations be­
tween negative prices and risk premia. Therefore, these associations
could possible mean that market agents are willing to pay, in order to
reduce their exposure to negative electricity prices periods. As previ­
ously mentioned, negative prices tend to remain the generation mix
inflexible. Such market design features, might have implications for DR
future implementation. According to our survey, DR increases their
potential to decrease market clearing prices in energy markets domi­
nated by fossil fuels technologies. The inability to stop traditional
thermal generators from reducing outputs may preserve these genera­
tion technologies in the supply composition of the EEX day-ahead
market. Such reality may increase market agent’s aversion to risk and
keep future associations between negative prices and risk premia.
The generation mix by itself, also constitutes a risk factor according
with the performed literature. The association between risk premium
and generation “fuels” such as natural gas, oil and coal was also clear in
Cartea and Villaplana (2014), Weron and Zator (2014) and in Herr� aiz
and Monroy (2009) studies. Apparently, energy markets dominated by
non-controllable energy sources, such as RES with high fixed costs and
marginal costs that tend for zero, have a lower tendency for DR poten­
tials. This is the case of energy markets dominated by hydropower fa­
cilities. Botterud et al. (2010) and Furio � and Meneu (2010) research
studies found associations between risk premium and hydrological
conditions. If per one side, the continuous integration of RES in the
energy markets supply tends to decrease the clearing market prices, per
other side tends to increase the uncertainty and the risk. Despite
Schwabeneder et al. (2019) refer the tendential absence of potential for
DR in markets with larger RES shares, DR will continue to represent an
added value for future energy markets deployment. Thus, it introduces
flexibility and might transmit confidence signals to markets agents. This
flexibility might be particularly useful during system instability periods.
System instability and excessive fluctuations may cause several distur­
bances, such as capacity constraints, outages, transmission bottlenecks,
peak demands and therefore, the potential for market power exercise.
Despite no clear associations were found between market power and risk
premia in the three analysed energy markets, studies indicate the pres­
ence of market power on some of the analysed markets (Lagarto et al.,
2014). Energy market structures where market power was identified,
such as in MIBEL, may suffer from higher day-ahead prices volatility.
Ferreira and Sebasti~ ao (2017) research found risk premium volatility
seasonality. Nevertheless, the seasonal spikes in MIBEL spot prices might
be associated with the exercise of market power during certain periods,
with a relevant hydropower generation contribution on energy market,
or with both.
When considering generation, both in EEX as well as in Nord Pool,
apparently hydroelectric capacity seems to have more impact on risk
premia. Nord Pool hydroelectric generation in the wholesale market has
a significant participation as well as in MIBEL, which is particularly for
Portugal generation mix. In MIBEL, during the year of 2018, large hydro
represented about 10.3% of the total the generation assets by technology
in the wholesale market participation, and in Portugal large hydro was
the double with 20.6% thus Spain generation are more diversified than
9
Utilities Policy 66 (2020) 101083
Portuguese generation portfolio (OMIE, 2020). Several studies reported
in Table 5, also establish associations between futures risk premia and
spot prices, confirming that these set the costs of electricity in the long
run. Nevertheless, spot prices formation cannot be dissociated from
other variables such as seasonality, demand consumptions or with the
generation portfolio composition of supply in the day-ahead market.
This emerges a “chicken-and-egg” problem category.
Other variables were also found to be related to risk premia such the
electrical system tightness, CO2 prices and characteristics associated
with generation and its “fuels” in different market designs. Nevertheless,
the system tightness and characteristics related to generation are vari­
ables associated with risk premium EEX according with the reported in
Table 5. The last variable together with CO2 prices was also related to
risk premia in Nord Pool. Nevertheless, CO2 prices are associated with
the supply market characteristics and generation fuels. Again, this
emerges a “chicken-and-egg” problem. The electrical system tightness, is
relevant in what refers to neighbouring countries energy importation
and exportations. Within the implementation of a single European en­
ergy market, this variable will assume a future larger importance.
Constraints caused by system tightness, might be overcome if DR con­
sumers are called to curtail of shift their load consumption in an emer­
gency period. Nevertheless, there are still major barriers in what this
matter concerns, both regarding the establishment of a harmonized
regulation for DR and for a single European energy market. Without
clear regulations it is not possible for consumers to actively enrol and
participate in their country’s energy wholesale markets neither in
neighbouring countries wholesale markets. Despite real DR programs for
consumers participation are already in action in some parts of the world,
there is still very few knowledges concerning real DR programs for
consumers participation in Europe. Despite the existing barriers, in
theory the benefits of DR in wholesale markets would emerge a positive
effect for all parties. Nevertheless, energy markets operation is quite
complex and risk may be attributed due to a large number of variables.
In future DR mechanisms integration on markets might be a support risk
control tool. But per other side, future DR full integration on markets
might be a chimera. From the economic perspective, some authors refer
that DR will suffers economic self-cannibalism (Schwabeneder et al.,
2019). Fernandez et al. (2020) work describes the existence a “merit-­
order effect of load-shifting” thus the main effects of load-shifting on the
market are qualitatively similar to renewables effect.
Despite the necessary regulatory framework development, DR
implementation need to be viable both from the technical and economic
point of view. This is a complex issue, due to the large number of vari­
ables involved both on technical and economic DR perspective’s. To
achieve viability, every parties involved should recognize DR value and
be rewarded for their flexibility and efforts.
In all the three analysed electricity markets energy-traders were
found to have risk-aversion, despite the presence of negative prices. As
previously referred, these might represent an additional risk-aversion
factor.
Nevertheless, negative prices are a specific characteristic of EEX.
Even though both in MIBEL and Nord Pool other variables were found in
the performed literature. Some clearly tend to influence positively or
negatively the future implementation of DR on the respective wholesale
market structures as previously referred.
Nevertheless, some of these variables seem to be associated with
each other and it is not possible to clearly state which one is the most
prevalent in each market or if these are somehow linked in between.
Moreover, and despite the research was focused on risk premia the
research studies, the different methodologies and models adopted may
help to justify the differences in the association found thus some studies
were focused on specific characteristics while others covered a wider
range. In any circumstance, it was possible to identify some variables
common to all the markets. This might indicate that despite the market
design a group of variables that might be common to all market designs
structures and another group of variables that might differ according
J. Sousa and I. Soares
with the specific market structure characteristics.
According to the arguments exposed in Section II, DR implementa­
tion would allow to smooth spikes and extreme fluctuations on spot
prices increasing market operation efficiency and energy-trader’s con­
fidence regardless the market design. Moreover, during contingencies
DR may act as a reserve capacity, offering load reductions to solve short-
term constraints in the system representing a possible planning resource.
5. Conclusions
5.1. Summary
From the performed survey and to our present knowledge, there are
few studies focusing the potentiality for DR in electricity markets with
different designs, namely, in what regards comparing market designs
with and without bid cap and floors mechanism, such is the case of the
EEX and the MIBEL market designs, respectively. In the performed study
several variables were identified to be associated with risk premia.
Despite this, those variables that more often are associated with risk
premia in the three analysed markets - MIBEL, EEX and Nord Pool - were
seasonality and inconstant demand. DR benefits, could help to manage
this volatility that cause market-agents aversion, thus DR has both
financial and operational benefits for demand and supply side load-
serving entities. Nevertheless, significant barriers still remain, before
DR resources contribute, in a significant way, to system operation. A
redraw of market design is needed to cross the boundaries between
wholesale and retail markets. To overcome the existing barriers, further
studies regarding DR potentialities in different market designs, need to
be developed. Only when both supply and demand flexibility cost-
analysis are positive, DR value would be recognized as an effective
resource.
5.2. Key outcomes and further work
As key lessons learnt from the performed literature, it is possible to
say that despite the differences on the three-market design, there are
variables that seem to be common to all market designs structures. In
what concerns the first research question it is possible to identify vari­
ables which affect energy prices. Some of these are common to all
markets and others are more specific to each market characteristics.
When focusing the second research question it was identified signals
in the performed literature that some market design structures tend to be
friendlier to DR potential initiatives, particularly those with lower
shares of RES. Nevertheless, it is still not possible to state that in which
market as DR future implementation would be friendlier.
Further work is necessary to be done in order to evaluate these
markets DR potential, particularly in what regards its economic poten­
tial. Both the technical and economic potentials are needed. But while
the technical potential technologies will be developed with time,
without the economic potential the first does not make sense. Further
work regarding the impacts of load flexibility on clearing prices is
necessary to be performed in order to contribute to the already existing
knowledge.
Acknowledgements
This paper research work was supported by a grant contract No.
Norte-08-5369-FSE-000043 co-financed by the European Social Fund
under the Northern Regional Operational Program (Norte 2020).
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