Decisions on Energy Demand Response Option Contracts in Smart Grids Based on Activity-Based Costing and Stochastic Programming

Smart grids enable a two-way energy demand response capability through which a utility company offers its industrial customers various call options for energy load curtailment. If a customer has the capability to accurately determine whether to accept an offer or not, then in the case of accepting an offer, the customer can earn both an option premium to participate, and a strike price for load curtailments if requested. However, today most manufacturing companies lack the capability to make the correct contract decisions for given offers. This paper proposes a novel decision model based on activity-based costing (ABC) and stochastic programming, developed to accurately evaluate the impact of load curtailments and determine as to whether or not to accept an energy load curtailment offer. The proposed model specifically targets state-transition flexible and Quality-of-Service (QoS) flexible energy use activities to reduce the peak energy demand rate. An illustrative example with the proposed decision model under a call-option based energy demand response scenario is presented. As shown from the example results, the proposed decision model can be used with emerging smart grid opportunities to provide a competitive advantage to the manufacturing industry.