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Several demand response (DR) programs, such as critical peak pricing (CPP), stipulate that electric utilities may schedule events only a limited number of times per year. Utilities must therefore use these events judiciously in order to maximize their benefits from the DR program. Traditionally, they have used rather simple decision rules to schedule such events (e.g., when temperature exceeds a certain threshold). In this paper, we present an option value approach for determining when to invoke these events. This approach calculates a dynamic threshold value, which represents the option value of deferring the use of one the events for use at any future point in the planning horizon (typically a year or cooling season). This threshold enables utilities to make the decision on whether or not to call an event based on the expected current benefits versus potential future benefits. This paper presents an example based on an actual DR program, which uses a simple, temperature based threshold, and compares it with our option based approach. Our approach can also be applied to any other criteria besides temperature such as reserve margins and generation cost. Our approach may also be classified as an optimal stopping rule or optimal secretary problem in the operations research literature.
Date of Conference: 12-16 Sept. 2010