Modeling of Demand Response in Electricity Markets: Effects of Price Elasticity

Paper in proceeding, 2007

This paper deals with design of a mechanism of optimal participation of customer load in the energy market – demand response programs. The proposed mechanism is based on an optimal power flow framework and can aid the Independent System Operator (ISO) in real-time selection of demand response offers. The structure of the market is also proposed for implementation. Various issues associated with procurement of demand-response offerings such as advance notification, locational aspect of load, power factor of the loads, are explicitly considered. It is shown that demand response can help the ISO maintain operating reserves during peak load periods and can mitigate the price volatility. The paper also investigates the effects of price elasticity of demand on the net benefit of the demand-response program. The potential benefits of the demand response program would be reduced when price elasticity of demand is taken into account, which is most likely to occur in actual developed open electricity markets, such as Nordpool of the Nordic countries. The intention of this paper to further understanding and recognition of the importance of the effects of elasticity of demand when attempting to create demand response models in general. The CIGRE 32-bus system, which represents the Swedish high voltage power system, appropriately modified to include various customer characteristics, is used for the study.