Inter-Organizational Demand Response Applications: How to Address Moral Hazard in Smart Grids

Intermittent renewable energy sources such as wind and solar are increasingly integrated into the power grid. So-called Demand Response (DR) applications are a relatively low-cost and quick means to balance the resulting generation fluctuations. Against this background, the allegation of fraud against a large DR provider in 2011 gives rise to questions about a systematic cooperation problem. We address this potential market failure and analyze the demand response business model by using the principal agent theory (PAT). We show that hidden action can indeed lead to market failure. Among the possible PAT solutions we show that monitoring can be realized based on a combined openADR protocol and data integrity approach. Finally, we highlight the prospects of a standardized and automated IS-based solution and provide an outlook of current research gaps.