Evaluating demand side measures in simulation models for the power market

Increased energy efficiency is one of the pillars for reducing CO₂ emissions. However, in models for the
electricity market like unit commitment and dispatch models, increased efficiency of demand results in a
paradoxical apparent reduction of the total economic surplus. The reason is that these are partial models
for the electricity market, which do not take into account the effect of the changes in other markets. This
paper shows how the calculation of the consumer surplus in the electricity market should be corrected
to take into account the effect in other markets. In different cases we study shifts in the demand curve
that are caused by increased energy efficiency, reduced cost for substitutes to electricity and real-time
monitoring of demand, and we derive the necessary correction. The correction can easily be included in
existing simulation models, and makes it possible to assess the effect of changes in demand on economic
surplus.