Revenue Inadequacy With Demand Response Providers: A Critical Appraisal

This paper critically assesses the issue of revenue inadequacy due to the presence of standalone demand response providers (DRPs) in day-ahead wholesale electricity markets. Given the increasing penetration of renewable resources such as wind and solar, demand response offers a potential tool for mitigating their uncertainties. We find that if standalone DRPs are treated as “virtual generators,” there will be revenue inadequacy in the wholesale electricity market. In this paper, through a conceptual example we examine the economic model of DRPs in the wholesale electricity market. A potential two-step solution to the revenue inadequacy problem is proposed, which comprises of modified locational marginal prices and optional transfer payments between the load serving entities and DRPs. Two simple numerical examples are provided with the purpose of illustrating our proposed approach for the design of electricity markets with standalone DRPs.