Power companies such as Southern California Edi-son (SCE) uses Demand Response (DR) contracts to incentivize consumers to reduce their power con-sumption during periods when demand forecast ex-ceeds supply. Current mechanisms in use offer con-tracts to consumers independent of one another, do not take into consideration consumers' heterogene- ity in consumption profile or reliability, and fail to achieve high participation.
We introduce DR-VCG, a new DR mechanism that offers a flexible set of contracts (which may include the standard SCE contracts) and uses VCG pricing. We prove that DR-VCG elicits truthful bids, incen- tivizes honest preparation efforts, enables efficient computation of allocation and prices. With sim- ple fixed-penalty contracts, the optimization goal of the mechanism is an upper bound on probability that the reduction target is missed. Extensive sim- ulations show that compared to the current mech- anism deployed in by SCE, the DR-VCG mecha- nism achieves higher participation, increased relia-bility, and significantly reduced total expenses.