Is More Information Better than Less? Understanding the Impact of Demand Response Mechanisms in Energy Markets

Due to the integration of intermittent resources of power generation such as wind and solar, the amount of supplied energy will show unprecedented fluctuations. Electricity retailers can partially meet the challenge of matching demand and volatile supply by shifting power demand according to the fluctuating supply side. This so-called Demand Response mechanism requires innovations in Information Systems such as Advanced Metering Infrastructures. Whereas the technology side of these infrastructures is relatively well understood, further effort, to quantify the economic dimension of Demand Response, is strongly needed. Therefore, we present the foundation of a Demand Response system to model both costs and revenues based on-real world data. Although our model suggests that an average energy retailer faces initial setup costs for the infrastructure of up to €24 million, we provide evidence that savings from load shifting exceed the running costs of the Information System significantly – by more than €250k per year. With higher information granularities, revenues from Demand Response increase further. However, this effect is countervailed by disproportionately growing communication costs and opposes the common expectation that more information is better than less.