Managing demand uncertainty with cost-for-deviation retail pricing

The current rate structures for the electricity retailing exposes utility providers to the full wholesale market risks, and fail to incentivize end-use customers to better estimate and track their loads. In this paper, we propose a Cost-for-Deviation (CfD) retail-pricing scheme, which is designed to minimize the demand uncertainty of individual customers or communities. We formulate day-ahead planning and real-time tracking optimization problems for individual buildings. We also formulate CfD pricing scheme for community of two buildings and devise a collaboration scheme by which the two buildings negotiate. Both centralized and distributed negotiation mechanisms are presented, and the significance of adopting a transaction cost for fair-trading is discussed. A series of experiments demonstrate that CfD pricing is able to reduce demand uncertainty in a building or a community. Hence, a community's cost of hedging quantity risk in the real-time market also reduces. Our conjecture is that by the virtue of end users being in a position to closely monitor their daily loads and by paying fines for not adhering to their plans would ultimately benefit energy efficiency and will reduce infrastructure costs.