Demand Response Economics

DR introduces price responsiveness into electricity demand.

If demand is $D(P)$, elasticity is:

$$ϵ=\frac{\partial D}{\partial P}$$

Effects

• Increases $|ϵ|$ (demand becomes responsive)
• Reduces peak prices
• Lowers total system cost
• Reduces generator market power

Interpretation

Without DR, demand is largely inelastic. DR enables demand to respond to market conditions, improving efficiency.