Demand response is defined as the modification of consumption pattern in reaction to an external signal providing a service within the energy system. It has been recognized as having substantial efficiency potential as part of the liberalized energy markets. The study examines the introduction of demand response in the Nordic electricity markets, aiming at fluent adoption of this resource while obtaining the most profitable outcome concerning the net welfare. The study focuses on three main challenges; a suitable market model, verification, as well as the valuation and net benefits of demand response. Regarding the market model, the main challenge is defining an optimal mode of operations for the demand response markets. The main question concerns the adoption of separate third party aggregators, independent actors, which would be allowed to collect together a group of flexible consumers and offer their demand reduction to the markets without the consent of the customers’ supplier. There is a risk of creating unfair balancing costs to the supplier, which can be resolved by the design of the model. The different possible market configurations were analysed based on their suitability and their effect. The optimal solution was discovered to be a combination of selected models, allowing the participation of a wide range of resources. This encourages competition, which was found essential in achieving the full potential of demand response.The compensation for demand response is based on the reduced consumption, so there is a need for exact measurement. Demand response is the difference between the normal consumption level that never occurred and the actualized consumption. The most accurate method was discovered to be using a rolling average with some circumstantial correction to create a baseline, which can then be used in calculating the amount of response.It was discovered that paying full market price for demand response is essential in achieving the desired level of demand response. At the same time, this can create some efficiency losses and adverse effects to the suppliers which is why the net benefits should be investigated more thoroughly. The study concluded that demand response can have a negative net effect depending on the situation, and using mathematical net benefit estimation methods for limiting detrimental flexibility bids seems plausible.Demand response should be considered as a utility suitable for some situations instead of a comprehensive solution for market inefficiencies. This highlights the importance of assessing the overall effects before applying any changes in the current market structure.
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