Contract-Based Demand Response Mechanism for Commercial and Industrial Customers

Designing an optimal Demand Response (DR) program necessitates having information on the utility of users. However, that is not easily accessible since the users may not be willing to report their personal information. In this paper, we propose an incentive-based DR mechanism for Commercial and Industrial (C
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I) customers, leveraging contract theory to address the challenges of incomplete information and ensure the participation of customers in the DR program. Designing a DR mechanism includes specifying an incentive reward, penalty, and the corresponding demand reduction as functions of the customer’s utility information. These functions are obtained through an optimization problem that maximizes the grid operator’s profit, ensures truthful reporting of personal information and participation of the customers in the DR program. After formulating the optimal mechanism, the main technical challenge is reformulating the obtained non-convex and computationally inefficient optimization problem to a tractable and convex one. The extensive numerical evaluations demonstrate the effectiveness of our proposed framework in comparison to existing benchmark schemes.
Note to Practitioners
—Imbalances between supply and demand, particularly during the hot summer months, can result in issues such as power outages. This problem is detrimental for both grid operators and customers alike. DR programs have been implemented in numerous countries to address these challenges. C
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I customers, due to the schedulable nature of their loads, make for ideal targets for these programs. However, the main obstacle to implementing such programs is customer participation. Incentive rewards offered in these programs for load reduction are fixed for all customers, discouraging those with low rewards from participating and imposing high costs on grid operators for those with high rewards. On the other side, designing unique rewards and penalties for each customer necessitates information about their preferences, which grid operators cannot access. In this paper, we propose an incentive mechanism based on the contract between the grid operator and C
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I customers that ensures customers truthfully report their preferences while simultaneously maximizing grid operator profit and guaranteeing the participation of all customers. The proposed DR program can be implemented for large non-residential customers in order to reduce the peak load of the grid.