On the optimal design of demand response policies
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We characterize the optimal regulatory policy to promote efficient demand response (DR) in the electricity sector. DR arises when consumers reduce their purchases of electricity below historic levels at times when the utility’s marginal cost of supplying electricity is relatively high. The US Federal Energy Regulatory Commission (FERC) advocates compensation for DR that reflects the utility’s marginal cost. We show that the optimal policy often provides less generous compensation, and demonstrate that implementation of the FERC’s policy can reduce welfare well below the level secured by the optimal DR policy.
KeywordsElectricity pricing Demand response Regulation
JEL ClassificationL51 L94
We thank the Editor, Michael Crew, two anonymous referees, seminar participants, and Burcin Unel for helpful comments and observations.
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