Optimal Electricity Demand Response Contracting with Responsiveness Incentives

Demand response programs in retail electricity markets are very popular. However, despite their success reducing average consumption, the random responsiveness of consumers to price events makes efficiency questionable achieve flexibility needed for electric systems with a large share renewable energy. This paper aims at designing demand contracts that allow act on both consumption and its variance. The interaction between risk-averse producer consumer is modelled as principal–agent problem, thus accounting moral hazard underlying contracts. producer, facing limited production, pays an appropriate incentive compensation encourage reduce his enhance responsiveness. We provide closed-form solution optimal contract linear case. show has rebate form where initial condition serves baseline charged energy volatility. first-best convex combination marginal cost value energy, weights given by risk-aversion ratios, volatility ratio times second-best price, volatility, decreasing nonlinear function time inducing effort. lower (respectively, higher) than during peak-load off-peak) periods. illustrate potential benefits issued from implementation mechanism calibrating our model publicly available data.