Principal-Agent Model for Bilateral Contract Design to Incentivize Residential Demand-Side Flexibility

Demand response (DR) is a viable solution to increase the grid's operational efficiency. However, the effective participation of residential customers in DR programs is low, and the available potential of this sector has not been fully utilized. One important reason for this low engagement is the unavailability of amenable demand curtailment contracts that simultaneously include customer preferences and behavior and utilize enabling technologies to realize the full potential to manage usage. This paper addresses the critical need for increasing residential DR by designing economic contracts that maximize power utility's/load serving entity's (LSE) net benefit while considering individual customers' utility. Specifically, we propose a principal-agent model to develop optimal demand curtailment contracts between the LSE and customers based on their willingness-to-pay (WTP) for cooling degrees. Emphasis is on designing contracts that offer critical peak rebates (CPRs). These contracts allow the LSE a short-term load control of customers' facilities to reduce demand by remotely altering individual household thermostat settings of the Heating, Ventilation, and Air Conditioning (HVAC) systems. The efficiency of the proposed contracts is evaluated using several simulation case studies.