Incentives-Based Mechanism for Efficient Demand Response Programs

In this work we evaluate the inefficiency in the sense of Pareto of the electricity system and its similarity to the tragedy of the commons. Also, we propose an incentives scheme that promotes optimal outcomes in the inefficient electricity market. The economic incentive might be seen as an indirect revelation mechanism that uses a one dimensional message space, and it is valid for any concave electricity valuation function. These incentives are calculated for each user only based on the consumption of the population. We propose a distributed implementation of the mechanism using population games and evaluate the performance of four popular dynamics methods in terms of the cost to implement the mechanism. We find that the achievement of efficiency in strategic environments might be achieved at a cost, which is dependent on both the users’ preferences and the dynamic evolution of the system. Some simulation results illustrate the ideas presented throughout the paper. Index Terms Smart grid, demand response, electricity market, dynamic pricing, game theory, mechanism design, indirect revelation, budget balanced, resource allocation.