Prudent Price-Responsive Demands

Liudong Chen and Bolun Xu

Papers from arXiv.org

Abstract: We investigate a flexible demand with a risk-neutral cost-saving objective in response to volatile electricity prices. We introduce the concept of prudent demand, which states that future price uncertainties will affect immediate consumption patterns, despite the price expectations remaining unchanged. We develop a theoretical framework and prove that demand exhibits prudence when the third-order derivative of its utility cost function is positive, and show a prudent demand demonstrates risk-averse behaviors despite the objective being risk-neutral. . Prudent demands exhibit skewness aversion, with increased price skewness elevating the cost associated with prudence. We validate our theoretical findings through numerical simulations and conclude their implications for demand response modeling and the future design of incentive-based demand response mechanisms.

Date: 2024-05
New Economics Papers: this item is included in nep-upt
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