Efficiency improvement of decentralized incentive-based demand response: Social welfare analysis and market mechanism design

Abstract: Coupon Incentive-based Demand Response (CIDR) is a novel type of demand response mechanism targeting at small residential end-consumers, and has advantages over traditional Demand Response (DR) programs in its adaptability to most electricity retail plans, voluntary and without penalty. CIDR’s three-layer mechanism was modeled with Stackelberg Game in the authors’ previous studies, and its Nash Equilibrium is usually obtained by iterative solution. However, there is limited study on the efficiency and social welfare of the traditional CIDR mechanism. This paper provides the following contributions: (1) Introducing the response function of consumers and Load Serving Entities (LSEs) considering bounded rationality, and modeling the demand response resources as Virtual Power Plants (VPPs) to find the analytical solution; (2) By comparing the response function with centralized dispatch, this paper reveals the social welfare loss under the Nash Equilibrium of current CIDR mechanism; (3) An Extra Incentive Term (EIT) awarded to the LSE was designed to maximize the social welfare, and its form and parameters are determined under different conditions such as multiple DRs and LSEs, as well as congested power system. The case study shows that EIT has successfully helped to improve the social welfare as well as increased the retail saving and suppressed Locational Marginal Prices in most scenarios.