Optimally designed retail rates to incentivize demand response

Perhaps one of the most transformative aspects of smart grid realization is the inclusion of the demand side as an active participant in maintaining desired grid conditions. For decades, the demand side has been treated as passive and the traditional design of electricity markets, retail rates and distribution networks has reflected that view. The increasing penetration of smart grid devices, such as smart meters and smart appliances, provides an opportunity to maximize the value of an active demand side, in particular, the value of demand response (DR). In this paper, we explore optimally structured retail rates based on market conditions and local network conditions as a means of enabling consumer choice and incentivizing DR. We argue that the most effective means of encouraging an active demand side is to provide consumers with appropriate economic signals and sufficient choices.