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The aggregator’s contract design problem in the electricity demand response market

Author

Listed:
  • Daeho Kim

    (Pohang University of Science and Technology)

  • Dong Gu Choi

    (Pohang University of Science and Technology)

Abstract

As demand response programs have been deployed worldwide, a new business model, called the demand response aggregator, has recently emerged in some countries and regions. In this study, we identify the supply chain interactions of the business model in the demand response market and investigate the optimal contract design for the aggregator. The main challenge in the contract design problem is caused by asymmetric information between the aggregator and customers. Basically, the customers have two pieces of private information: their demand response potential and disutility level. We first apply the principal-agent model paradigm to formulate a reference model for this problem. In addition, using our model, we analytically and numerically examine the effects of the two pieces of private information on contract design and derive some strategies for the aggregator. Our analytical and numerical analyses find that the private information induces the aggregator to pay additional incentives for customers. However, when the customers accurately know their private information, the aggregator can minimize the profit loss from asymmetric information by suggesting a menu of contracts, which induces the customers to choose their best options. The aggregator can induce customers to reveal their own types of demand response potentials without paying any informational rent by using the separating contract structure since the customers choose the best contract among the menu in terms of their own profit. This study could advance a new business model, naturally promoting demand response programs.

Suggested Citation

  • Daeho Kim & Dong Gu Choi, 2023. "The aggregator’s contract design problem in the electricity demand response market," Operational Research, Springer, vol. 23(1), pages 1-47, March.
    • Handle: RePEc:spr:operea:v:23:y:2023:i:1:d:10.1007_s12351-023-00753-1
    DOI: 10.1007/s12351-023-00753-1
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    References listed on IDEAS

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