Investigating the effects of demand flexibility on electricity retailers' business through a trilevel optimisation model

Abstract

The investigation of the effects of demand flexibility on the pricing strategies and the profits of electricity retailers hasrecently emerged as a highly interesting research area. However, the state-of-the-art, bi-level optimisation modelling approachmakes the unrealistic assumption that retailers treat wholesale market prices as exogenous, fixed parameters. This studyproposes a tri-level optimisation model, which drops this assumption and represents the wholesale market clearing processendogenously, thus capturing the realistic implications of a retailer's pricing strategies and the resulting demand response on thewholesale market prices. The scope of the examined case studies is three-fold. First of all, they demonstrate the interactionsbetween the retailer, the flexible consumers and the wholesale market and analyse the fundamental effects of the consumers'time-shifting flexibility on the retailer's revenue from the consumers, its cost in the wholesale market and its overall profit.Furthermore, they analyse how these effects of demand flexibility depend on the retailer's relative size in the market and thestrictness of the regulatory framework. Finally, they highlight the added value of the proposed tri-level model by comparing itsoutcomes against the state-of-the-art bi-level modelling approach.