  We design an optimal contract between a demand response aggregator (DRA) and
power grid customers for incentive-based demand response. We consider a setting
in which the customers are asked to reduce their electricity consumption by the
DRA and they are compensated for this demand curtailment. However, given that
the DRA must supply every customer with as much power as she desires, a
strategic customer can temporarily increase her base load in order to report a
larger reduction as part of the demand response event. The DRA wishes to
incentivize the customers both to make costly effort to reduce load and to not
falsify the reported load reduction. We model this problem as a contract design
problem and present a solution. The proposed contract consists of two parts: a
part that depends on (the possibly inflated) load reduction as measured by the
DRA and another that provides a share of the profit that accrues to the DRA
through the demand response event to the customers. Since this profit accrues
due to the total load reduction because of the actions taken by all the
customers, the interaction among the customers also needs to be carefully
included in the contract design. The contract design and its properties are
presented and illustrated through examples.

Optimization and Control