Dynamic Pricing: An Efficient Solution for True Demand Response Enabling

Dynamic pricing scheme, also known as real-time pricing (RTP), can be more efficient and technically beneficial than the other price-based schemes (such as flat-rate or time-of-use (TOU) pricing) for enabling demand response (DR) actions. Over the past few years, advantages of RTP-based schemes have been extensively discussed for DR purposes in electricity markets; however, they have not been proven mathematically according to a valid economics-based model. Instead, most of the related literature has only relied on observations and experiences in the markets of other commodities. Thus, to provide a reliable reference point based on mathematical models, this paper utilizes well-known economics theories and mathematical formulations to prove the impact of RTP on true enabling of DR actions in electricity markets. Based on the theory of saving under uncertainty, it is shown that the use of dynamic pricing can lead to increased willingness of consumers to participate in DR programs which in turn improve the operation of liberalized electricity markets.