Revolutionizing Electricity Markets: Maximizing Social Welfare Through Options Contracts
The article explores ways to trade demand response assets in electricity markets. It compares using a spot market with contingent pricing to over-the-counter options contracts. The spot market is socially optimal but requires expensive infrastructure. Options contracts are private and don't need regulatory approval, but may not always support optimal social welfare. The researchers found that designing optimal option prices can help approximate the efficiency of the spot market for demand response, with only a modest loss of efficiency.