Optimizing demand response price and quantity in wholesale markets

We propose a method to create a supply curve for demand response (DR) analogous to, but separate from, a generation supply curve. This new demand side “supply curve” is used to offer DR into the wholesale market as a demand resource, not a competitive generation source and therefore, unable to set locational marginal price (LMP). This DR supply curve is based on the value of increased gross margin due to load modifications. While this supply curve is based on optimizing a load serving entity´s gross margin, the maximum level of DR allowed in the market is based on the amount of DR that brings the market balance to zero (i.e. wholesale revenue equals generator and DR expenses). The proposed method is compared to compensation according to FERC Order 745. We find that while compensation according to Order 745 always results in a negative balance (less revenue than expenses) and a need to allocate that cost, the proposed method achieves a positive balance for low levels of DR, zero balance at an optimal DR level, and a negative balance only if too much DR is purchased.