Constructing a (fair) load-reduction emergency demand response program: A fee-and-rebate pricing mechanism

Abstract

Emergent power shortages and power outages cause enormous economic losses. Special fees and rebates at times when the operating reserve is below standard are among the most popular mechanisms for driving demand response, i.e., a spontaneous reduction in power usage, to help alleviate peak loads. However, a rebate which is uniform for all users usually under- or over-estimates companies’ incentive to respond, as product profitability and the cost of manufacturing vary from one company to another. As a result, the power provider either fails to sufficiently reduce the load during a period of scarcity of electric power or unduly sacrifices profits to pay an excessive rebate. This study presents a Stackelberg game-theoretic model that determines discriminative rebates and scarcity pricing of electricity, thereby capturing incentives of different industrial users to respond rationally and reduce their power usage. The model can be used to assess the current pricing and rebate structure and has the potential to serve as the fee-and-rebate mechanism in an Emergency Demand Response Program. A case study is used to simulate a game between the Taiwan Power Company and four classes of heterogeneous industrial customers who are willing to cooperate with the power provider on implementation of an Emergency Demand Response Program. The results show that the profits of the participants are higher than the profits of the non-participants. Moreover, a high-value-added and non-interruptible manufacturing class should be paid higher rebate.