In demand response (DR) programs, electrical utility companies compensate consumers for reducing their energy usage during times of system stress or high market electricity prices. Investment in DR has surged significantly over the last decade, despite the fact that these programs have existed for almost two decades. Numerous utilities and distributed system operators have long realized the advantages of deploying DR programs in deregulated markets. Power utilities can acquire load demand from their consumers at a lower cost than they would pay to deliver it, thereby reducing the utility system's peak demand and assisting in the reduction of peak commercial electricity market costs. Additionally, consumers may be asked to lower their demand during off-peak hours to enhance grid reliability and eliminate the need to expand transmission or distribution capacity.

DR or load-management programs fall into two major categories. The first describes when and how electrical utilities make load-shedding requests to members enrolled in these programs. The second illustrates how electrical utilities entice consumers to engage in DR programs. Utilities may utilize direct communication methods such as internet, telephone or pager to alert users of financial activities or reliability requiring load response in return for immediate payment from utility. This article discusses these two popular types of DR programs, also referred to, respectively, as time-based or incentive-based options.

Incentive-based DR programs

In these programs, consumers willingly engage by enabling system operators to manage specific electrical equipment directly, such as HVAC equipment, during emergency or peak hours. Such programs can be categorized into direct load control, interruptible/curtailable service, emergency DR programs, capacity market programs and demand bidding programs. For a long period of time, electrical utilities have employed DR techniques such as direct load control and interruptible/curtailable service.

In interruptible/curtailable programs, participating members receive rewards in return for reducing their load demand to the required predefined levels. Additionally, those who do not react may be fined, depending upon terms and conditions of the program. In direct load control, power utilities may automatically turn off a user’s electrical appliances on a short notice. Water heaters and air conditioners are two examples of such remotely controlled electrical appliances. This type of offer primarily targets residential and small commercial consumers.

Under an emergency incentive-based DR program, users are compensated for their measured load reductions only when there is an emergency. Moreover, participants in a capacity market program are those who can supply pre-specified load reductions in the event of system contingencies. And, in demand bidding DR programs, customers bid on individual load reductions in wholesale energy markets. Acceptance of a bid occurs when it is lower than the market energy price. If a bid is approved, the participant is required to reduce the load by the stated amount or suffer penalties. In ancillary service markets, DR enables parties to bid for load reduction as operational reserves rely solely on the market.

Price-based DR programs

At a broad level, time-sensitive DR programs can be categorized into time of use, real-time pricing and critical peak pricing. In particular, such programs are built on dynamic pricing plans, with the primary goal of flattening the load curve by charging more during peak hours and charging less during off-peak hours. One disadvantage that customers may experience when using price-based DR programs is keeping up with tariff changes. This difficulty can be overcome by developing scheduling algorithms that control loads automatically in response to predetermined or dynamic tariff changes.

In time of use DR programs, the cost of power is defined for peak and off-peak periods of time and the intervals of power utilization are classified as off-peak (less expensive) and peak (more expensive). Critical peak pricing has a unique tariff structure for DR events when power use rates are extremely high, and participants or customers will be advised of the price information well in advance of the event. Generally, critical peak pricing time-based programs are deployed only in the event of an emergency. In real time pricing, also known as hourly pricing, users are notified of prices on an hourly or a day-ahead basis, and several economists believe that real-time pricing programs are perhaps the most efficient and direct DR programs for dynamic energy markets.

Stationary and non-stationary DR programs

In a stationary DR program, each participant maintains constant power consumption habits as long as the system requirements remain constant. Most DR programs, such as time of use pricing plans, are examples of stationary DR schedules. However, in a non-stationary DR system, users may adjust power consumption habits; for example, a customer may adjust peak-time consumption on any day desired even though the system requirements stay constant.


DR programs enable the demand side to optimize its consumption in real time in response to changing pricing or incentives. This power consumption flexibility may be an effective tool for the energy market to address a number of operational and reliability challenges. As a result, they are critical to ensuring the stability of the energy network, providing supply security, and maintaining a healthy balance of supply and demand in any country's energy system.

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