An Economic Analysis of Pervasive, Incentive-Based Demand Response

Demand response (DR) emerges as one of the cheapest and greenest solutions to match supply and demand in the electricity sector. While DR has been focused on large and industrial consumers, pervasive implementation (by including residential consumers) is needed to maximize its potential. This paper presents theoretical analysis of pervasive, incentive-based DR from the economics perspective. Our analysis consider cases whether (1) DR is used to encourage consumers to decrease or increase their demand, and (2) utility companies have access to a single or multiple energy sources. We determine the necessary conditions and derive the optimal incentives to benefit from DR events.