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Demand Response: Smart Market Designs for Smart Consumers

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  • Nicolas Astier
  • Thomas-Olivier Léautier

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.

Suggested Citation

  • Nicolas Astier & Thomas-Olivier Léautier, 2021. "Demand Response: Smart Market Designs for Smart Consumers," The Energy Journal, , vol. 42(3), pages 153-176, May.
    • Handle: RePEc:sae:enejou:v:42:y:2021:i:3:p:153-176
    DOI: 10.5547/01956574.42.3.nast
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    References listed on IDEAS

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    1. Koichiro Ito, 2015. "Asymmetric Incentives in Subsidies: Evidence from a Large-Scale Electricity Rebate Program," American Economic Journal: Economic Policy, American Economic Association, vol. 7(3), pages 209-237, August.
    2. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, December.
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