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CEIC-07-13

"Analyzing PJM's Economic Demand Response Program"
Rahul Walawalkar, Seth Blumsack, Jay Apt, and Stephen Fernands

Abstract:
We analyze the economic welfare properties of the economic demand response program in the PJM electricity market. The program provides a number of subsidies and side payments to customers who agree to reduce load in a given hour. The program features a price level or "trigger point," currently set at $75/MWh, at or beyond which incentive payments for load reduction are made available. No incentives are available when market prices are below the trigger point. Particularly during peak hours, the program does save money for the system, but the subsidies involved introduce distortions into the market. We simulate demand-side bidding into the PJM market during 2006, and compare the social welfare gains with the subsidies paid to price-responsive load. We find that the largest economic effect comes from large wealth transfers from generators to non price-responsive loads. Based on the current incentive payment structure, we estimate that the social welfare gains exceed the distortions introduced by the subsidies. Lowering the "trigger point" increases the transfer from generators to loads, but may result in the subsidy outweighing the social welfare gains due to load curtailment.

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