Making the least reactive pay: A consumer penalty/reward mechanism for Demand Response programs

Dr Jacopo Torriti, University of Surrey

The orthodox approach for incentivising Demand Response (DR) programs is that utility losses from capital costs, installations and planning DR should be recovered under financial incentive mechanisms such as the Cost Recovery Mechanisms and the Lost Revenue Mechanisms. These mechanims aim to ensure that utilities have the right incentives in place to implement DR activities. The national smart metering roll-out in the UK means that utilities will already recover the capital costs associated with DR technology and recoup them through higher bills or upfront fees. This paper introduces a penalty/reward mechanism focusing on consumers. The utility DR planning costs are still recovered through payments from those consumers who do not react to price signals. In addition, those consumers who react to price signals, hence shifting loads, will be rewarded by paying less for their electricity consumption. Because real-time incentives to residential consumers tend to fail due to the negligible amounts associated with net gains (and losses) for the individual consumer, in the proposed mechanism the regulator determines cumulative benchmarks which are matched against responses to price signals and caps the level of payments/rewards to avoid market distortions. The paper (i) presents an overview of existing financial incentive mechanisms for DR; (ii) introduces the penalty/reward mechanism aimed at fostering DR under the hypothesis of smart metering roll-out; (iii) considers the costs  faced by utilities for DR programs; (iv) assesses linear rate effects and value changes; and (v) introduces compensatory weights for those consumers who have physical or financial impedements.

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