Analyzing PJM's economic demand response program

We analyze the economic properties of the economic demand response program in the PJM electricity market. The original program provided subsidies and side payments to customers who agreed to reduce load in a given hour. The program featured a price level or "trigger point," set at $75/MWh, at or beyond which incentive payments for load reduction were made available. No incentives were available when market prices were below the trigger point. Particularly during peak hours, such a 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 arises through wealth transfers from generators to non price-responsive loads. Based on the incentive payment structure that was in effect through the end of 2007, we estimate that the social welfare gains exceed the distortions introduced by the subsidies. Lowering the "trigger point" increases the transfer from generators to consumers, but may result in the subsidy outweighing the social welfare gains due to load curtailment.