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Demand response and dynamic retail pricing of electricity are key factors in a smart grid to reduce peak loads and to increase the efficiency of the power grid. Air-conditioning and heating loads in residential buildings are major contributors to total electricity consumption. In hot climates, such as Austin, Texas, the electricity cooling load of buildings results in critical peak load during the on-peak period. Demand response (DR) is valuable to reduce both electricity loads and energy costs for end users in a residential building. This paper focuses on developing a control strategy for the HVACs to respond to real-time prices for peak load reduction. A proposed dynamic demand response controller (DDRC) changes the set-point temperature to control HVAC loads depending on electricity retail price published each 15 minutes and partially shifts some of this load away from the peak. The advantages of the proposed control strategy are that DDRC has a detailed scheduling function and compares the real-time retail price of electricity with a threshold price that customers set by their preference in order to control HVAC loads considering energy cost. In addition, a detailed single family house model is developed using OpenStudio and Energyplus considering the geometry of a residential building and geographical environment. This HVAC modeling provides simulation of a house. Comfort level is, moreover, reflected into the DDRC to minimize discomfort when DDRC changes the set-point temperature. Our proposed DDRC is implemented in MATLAB/SIMULINK and connected to the EnergyPlus model via building controls virtual test bed (BCVTB). The real-time retail price is based on the real-time wholesale price in the ERCOT market in Texas. The study shows that DDRC applied in residential HVAC systems could significantly reduce peak loads and electricity bills with a modest variation in thermal comfort.