Demand response procurement framework: a new four-step probabilistic method

This study presents a new market-driven and transparent pricing mechanism for demand response (DR) that ensures social welfare is maximised. The existing methods have DR priced at the electricity market clearing price (EMCP), where the EMCP is determined in a market solely comprised of aggregated generator price bids and demand bids. DR supply bids are not included in the current economic market model, resulting in inefficient markets. The authors also present a new metric, Actual Price, which captures two key elements missed by EMCP: (a) the price paid to DR suppliers (EMCP covers only the price paid to generators); and (b) the reduced pool of paying consumers when DR suppliers leave the buyer pool. An implementable process for DR planning using the authors' new concepts is presented. Results are shown for systems with and without location pricing. The results demonstrate that the proposed DR procurement method yields lower Actual Prices than existing methods and results in savings for customers. These ideas can guide regulators in determining market-based pricing policies for DR as well as Independent System Operators and system operators in determining DR procurement levels.