Demand Response in Electricity Markets: Voluntary and Automated Curtailment Contracts

Abstract

Demand response firms that offer curtailment contracts provide incentives for consumers to reduce consumption during peak demand events. The foregone consumption is sold as virtual supply on the electricity market. We explore two curtailment contract types: automated and voluntary. The automated contract requires set curtailment from enrolled consumers, whereas the voluntary contract allows curtailment to vary with the consumer's opportunity cost. In this paper we study the optimal choice of contract type, first from the firm's point of view and then from a social planner's perspective. We show how either contract type can be optimal depending on market/customer conditions. More specifically, when the supply curve for the wholesale electricity market has a steep slope, the firm would prefer to rely on automated contracts. On the other hand, if the cost of curtailment for the customer is highly variable, the firm might prefer to offer a voluntary contract. While the firm's optimal choice is not always welfare maximizing, we find that it does maximize curtailment and so can be viewed as consistent with the environmentally optimal choice. We demonstrate our theoretical findings using a case study from a curtailment service provider, EnerNOC, and data from the PJM electricity market.