Incentives or time-of-use pricing: Strategic responses to electricity demand response programs for energy-intensive manufacturers

Abstract

The integration of renewable energy into the electricity grid introduces significant challenges due to its intermittent nature, necessitating effective electricity demand response programs (EDRPs) to manage industrial consumption patterns. Energy-intensive manufacturers, while well-positioned to benefit from programs such as Time-of-Use (TOU) pricing and Incentive-Based Programs (IBPs), encounter operational complexities associated with production adjustments and potential reductions, complicating their participation. This study develops an analytical model to explore optimal responsive strategies for manufacturers under TOU pricing and IBPs, with the goal of minimizing total operational costs. The results indicate that TOU pricing enables manufacturers to adopt either load shifting (LS) or load reduction (LR) strategies depending on penalty costs. However, under IBPs, insufficient incentives often result in non-responsiveness (NP). While higher off-peak responsive costs typically make LR strategies more appealing, manufacturers under TOU pricing are more likely to adopt LS strategy as responsive costs increase, when faced with shorter expected peak periods. In contrast, the choice between LS and NP strategies under IBPs is unaffected by peak period uncertainty. A comparative analysis reveals that IBPs offer superior responsive performance when penalty costs are sufficiently high, but TOU pricing generally outperforms IBPs in productive performance across most scenarios. These findings, illustrated through a case study, provide valuable insights for manufacturers in selecting the most appropriate responsive strategies, helping them navigate the trade-offs between electricity cost savings and operational burdens under different EDRPs.