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Demand Response: Smart Market Designs for Smart Consumers

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Abstract:
We study Peak-Time-Rebates (PTR) contracts in day-ahead electricity markets. Such contracts reward customers for reducing their consumption when wholesale prices are high. We start by pointing out that these market designs create arbitrage opportunities which, under asymmetric information, incentivize strategic consumers to inflate their baseline. We then show that an incentive compatible PTR design is equivalent to a variable Critical-Peak-Pricing design (vCPP), in which customers have to purchase their peak consumption at the spot price. Under asymmetric information, a relevant question is thus to design vCPP contracts optimally in order to achieve high enrollment rates under voluntary opt-in. This problem has different solutions depending on whether policy-makers choose to maintain existing cross-subsidies or not.

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Keywords: Demand response, Asymmetric information, Market design, Cross-subsidies, Opt-in

DOI: 10.5547/01956574.42.3.nast

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Published in Volume 42, Number 3 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.

 

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