Designing cost effective demand management contracts using game theory

Demand relief from customers can help an electric utility solve a variety of problems. There exist all sorts of different demand management programs that utilities use. A critical issue is the incentive paid to the customer to participate in demand management programs and provide load relief. The utility has to design cost effective yet attractive demand management contracts. The main goal is to get load relief when needed. If the contracts are designed to be cost effective they can help the utility reduce costs. Customers sign up for programs when the benefits they derive in the form of up front payments and interruption payments exceeds their cost of interruption. In order to design such contracts, mechanism design with revelation principle is adopted from game theory and applied to the interaction between a utility and its customers. The idea behind mechanism design is to design a program incentive structure that encourages customers to reveal their true value of power (and thus, the value of power interruptibility) without the need to explicitly have customers declare the value. This economic analysis is combined with power system sensitivity analysis to help determine the value of interruptibility for each system location.