Selling Demand Response Using Options

Wholesale electricity markets in many jurisdictions use a two-settlement structure: day-ahead market for bulk power transactions and real-time fine-grain supply-demand balancing. This paper explores trading demand response assets within this structure. We consider two approaches assets: (a) an intermediate spot with contingent pricing, (b) over-the-counter options contract. In the first case, we characterize competitive equilibrium of market, show that it is socially optimal. Economic orthodoxy advocates markets, but these require expensive infrastructure regulatory blessing. second equilibria compare its efficiency idealized market. Options contract are private bilateral do not approval. optimal social welfare is, general, supported. then design option prices minimize gap. serves to approximate ideal using modest loss efficiency. Our results validated through numerical simulations.