Characterizing the Optimal Incentives for Pervasive Demand Response

Demand response (DR) emerges as one of the cheapest and greenest solutions to match supply and demand in the electricity sector. Compared to price-based DR, incentive-based DR is considered to be more promising, since it does not require consumers to monitor price fluctuation (which often considered as an additional burden). In addition, it allows utility companies to design more attractive and customized incentives to encourage consumer participation in DR events. While DR has been focused on large and industrial consumers, pervasive implementation (by including residential consumers) is needed to maximize its potential. This paper present theoretical analyses from the economics perspective of pervasive, incentive-based DR. Our analyses focus more on the commodity subsystem rather than the physical subsystem, and consider cases (1) whether DR is used to encourage consumers to decrease or increase their demand, and (2) whether utility companies have access to a single or multiple energy sources. We determine the necessary conditions to benefit from DR events and derive the optimal incentive to maximize gain from the events.