Fouad El Gohary: Diagnosing Demand Flexibility: On the limitations of price signals

Abstract

Mitigating the risks of catastrophic climate change requires wide-scale electrification and the rapid decarbonization of the energy sector. This transformation poses serious challenges to the management of electricity grids, ranging from increasingly intermittent generation to capacity constraints. One of the primary approaches employed to deal with these problems is demand-side flexibility (DSF), which applies a variety of policies that are broadly intended to manipulate electricity demand in ways that are conducive to the needs of the grid. Central to this approach are price signals, which convey information to users through electricity prices or incentives intended to elicit certain changes in behavior. The efficacy of price signals in fostering DSF has been limited and ambiguous. This thesis explores limitations in the current DSF strategy and its reliance on price signals, aiming to provide an understanding of its deficiencies and lay a foundation for alternative strategies.

The findings have been organized into two tracks. The first concerns the internalization of price signals, shedding light on how only a minority of residential users are qualified to make informed decisions in responding to price signals. The results suggest that the strict attribution of a low response to “weak” price signals or to cognitive difficulties is misplaced, and that the failure of DSF policies may partly stem from a general ambivalence towards electricity consumption. The second track concerns the design of price signals and illustrates inconsistencies between their alleged goals and the behaviors that they would hypothetically elicit. These inconsistencies partially stem from the architecture of the electricity market but are also the outcome of a trade-off between the complexity of electricity pricing and the desire to render price signals comprehensible.

Both of these tracks revolve around “functional” limitations, focusing on how price signals operate as instruments of behavioral change. The thesis also outlines a set of “structural” limitations that instead concern the fundamental reliance on price signals as the main mechanism for fostering DSF – a phenomenon described as the “price signal paradigm”. Under a paradigm that prioritizes free markets, minimal government involvement and a perception of users as price-responsive utility maximizers, policymakers have shifted the burden of responsibility onto users while constraining themselves to the limited role of information providers and signal designers. The implications of these findings are that policymakers should explore alternatives that shift responsibility back to system-level actors that are better suited for coordinating and fostering DSF.