Contract design for demand response

The provision of ancillary services in case of realtime imbalances is an essential part of secure power system operation. Demand side participation via direct load control is a new flexible source for reliable provision of ancillary services and supports the large scale integration of fluctuating renewable energy in-feed. However, rewarding contracts have to be designed such that the consumers have financial incentives to provide these services. This paper proposes a contract design framework based on non-linear pricing, which means that capacity reservation and the deployment of reserve energy are rewarded separately. It is (a) individually rational which means that the consumer does not make a loss in providing flexibility, and (b) incentive compatible such that the consumer is not tempted to mispresent his costs of flexibility. A simulation study shows the impact of several design parameters of contracts such as duration, accuracy of estimated cost functions and a competitive framework.