Optimal use of incentive and price based demand response to reduce costs and price volatility

•An optimum scheme of demand response is designed for small customers that would guarantee fair benefits for all participants.•Each utility would run its own demand response for their customers using region based design.•Customer comfort constraint and load change threshold is modeled using bottom up approach.•The proposed program would reduce total generation cost and price variation in the wholesale market.•The proposed incentive based program would calculate the required load change, adequate incentive value and best time to implement demand response all together. There are two general categories of demand response (DR): price-based and incentive-based DR programs. Each one has its own benefits taking advantage of different aspects of flexible demand. In this paper, both categories of DR are modeled based on the demand-price elasticity concept to design an optimum scheme for achieving the maximum benefit of DR. The objective is to not only reduce costs and improve reliability but also to increase customer acceptance of a DR program by limiting price volatility. Time of use (TOU) programs are considered for a price-based scheme designed using a monthly peak and off-peak tariff. For the incentive-based DR, a novel optimization is proposed that in addition to calculation of an adequate and a reasonable amount of load change for the incentive, the best times to realize the DR is found. This optimum threshold maximizes benefit considering the comfort level of customers as a constraint. Results from a reduced model of the WECC show the proposed DR program leads to a significant benefit for both the load serving entities (LSEs) and savings in customer's electricity payment. It also reduces both the average and standard deviation of the monthly locational marginal price (LMP). The proposed DR scheme maintains simplicity for a small customer to follow and for LSEs to implement.