Incentive Determination for Demand Response Considering Internal Rate of Return

Abstract

The rapid expansion of renewable energy sources has led to increased instability in the power grid of Jeju Island, leading to the implementation of the plus demand response (DR) system, which aims to boost electricity consumption during curtailment periods. However, the frequency of curtailment owing to the increased utilization of renewable energy is outpacing the implementation of plus DR, highlighting the need for additional resources, such as energy storage systems (ESS). High initial investment costs have been the primary hindrance to the adoption of ESS by DR-participating companies but have not been fully considered in earlier studies on DR incentive determination. Therefore, this study proposes an algorithm for calculating appropriate incentives for plus DR participation considering the investment costs required for ESS. Based on actual load data, incentives are determined using an iterative mixed-integer programming (MIP) optimization method that progressively adjusts the incentive level to address the overall nonlinearity arising from both the multiplication of variables and the nonlinear characteristics of the internal rate of return (IRR), ensuring that the target IRR is achieved. A case study on the impact of factors such as IRR, ESS costs, and fluctuations in electricity rates on incentive calculations demonstrated that plus DR incentives required to achieve IRR targets of 5%, 10%, and 15% have increased linearly from 142.2 KRW/kWh to 363.0 KRW/kWh, confirming that the appropriate incentive level can be effectively determined based on ESS investment costs and target IRR. This result could help promote ESS adoption among DR companies and plus DR participation, thereby enhancing power grid stability.