# Optimal Contract Design for Incentive-Based Demand Response

## TL;DR

This paper develops an optimal contract framework for demand response programs that incentivizes truthful load reduction reporting and maximal effort from customers, addressing strategic misreporting issues.

## Contribution

It introduces a novel contract design that balances effort incentives and truthful reporting in incentive-based demand response settings.

## Key findings

- Optimal contract includes load reduction-based payments and profit sharing.
- The proposed contract aligns customer incentives with the DRA's objectives.
- Solution addresses strategic misreporting by customers.

## Abstract

We design an optimal contract between a demand response aggregator (DRA) and a customer for incentive-based demand response. We consider a setting in which the customer is asked to reduce her consumption by the DRA and she is compensated for this reduction. However, since the DRA must supply the customer with as much power as she desires, a strategic customer can temporarily increase her base load to report a larger reduction as a part of the demand response event. The DRA wishes to incentivize the customer both to make the maximal effort in reducing the load and to not falsify the base load. We model the problem of designing the contract by the DRA for the customer as a management contract design problem and present a solution. The optimal contract consists of two parts: a part that depends on (the possibly inflated) load reduction as measured and another that provides a share of the profit that ensues to the DRA through the demand response event to the customer.