Role of residential demand response in modern electricity markets

Electricity generation must match the demand at each instant, following seasonal patterns and instantaneous fluctuations. Thus, one of the biggest drivers of costs and capacity requirements is the electricity demand that occurs during peak periods.This paper reviews market-related problems of modern electric grids and possible solutions to address them. In particular, one techno-economical solution, namely residential demand response programs enabled by a smart grid, is analyzed and modeled in detail. The implications of this solution from both economic and policy perspectives are discussed.The analysis results in several insights: first a local optimum does not generally lead to a global optimum, especially for complex markets; second, in this approach, there exists a disconnection between the locus of the problem (electric utilities) and the locus of the solution (change of demand); third, any techno-economic solution must be carefully designed and global impact should be evaluated to ensure that the final objective is achieved; and fourth, two-way communication is an essential requirement for the successful deployment of smart grids.