Optimal DR Activation Strategy for Risk Aversion Considering Hourly Loads and Locational Prices

Demand response (DR) activation and dispatch introduce additional economic and security benefits to the power system operation and control. The strategies for DR activation and compensation are among critical market operation issues which continue to raise concerns among stakeholders. In this respect, DR cost allocation would be required to guarantee DR benefits to the independent system operator and individual participating consumers. This paper proposes a DR activation strategy considering hourly system load and locational marginal prices (LMPs) in which payoffs are optimized at effective LMP where DR dispatch occurs. This paper presents a closed-form solution for the DR activation strategy according to the FERC’s Net Benefits Test. A DR cost reallocation method is proposed using the contribution factor theory for managing financial risks which ensures market participants’ optimal payoff corresponding to the DR dispatch. The proposed framework is extended to consider practical DR activation strategies and cost reallocations. Case studies based on the IEEE 6-bus system and the IEEE 118-bus system illustrate the validity and effectiveness of the proposed DR activation strategy and cost reallocation method.