Abstract
Power companies such as Southern California Edison (SCE) uses Demand Response (DR) contracts
to incentivize consumers to reduce their power consumption during periods when demand forecast exceeds supply. Current mechanisms in use offer contracts to consumers independent of one another, do
not take into consideration consumers’ heterogeneity in consumption profile or reliability, and fail to
achieve high participation.
We introduce DR-VCG, a new DR mechanism that
offers a flexible set of contracts (which may include the standard SCE contracts) and uses VCG
pricing. We prove that DR-VCG elicits truthful bids, incentivizes honest preparation efforts,
and enables efficient computation of allocation and
prices. With simple fixed-penalty contracts, the optimization goal of the mechanism is an upper bound
on probability that the reduction target is missed.
Extensive simulations show that compared to the
current mechanism deployed by SCE, the DR-VCG
mechanism achieves higher participation, increased
reliability, and significantly reduced total expenses