Economic Valuation of Demand Response Programs Using Real Option Valuation Method

Abstract

Demand response programs can be regarded as a risk management approach for retailers in electricity market. In case of high wholesale electricity price, implementation of demand response will reduce the economic risk exposure of the retailer. Realization of demand response requires investment in various sectors, and therefore, there is a need for economic valuation in order to determine the economic profit gained. This paper attempts to evaluate the economic value of demand response programs by the use of real option valuation method. In this regard, at first demand response programs are converted to option contracts. Then, the profit of retailer resulting from the demand response is calculated for an industrial customer. At last, realistic data from the Iran Grid Management Company (IGMC) are implemented in the case study.