Estimating the participation value of electricity demand-response programmes for a two-stage production system

Electricity demand-response programmes, such as the incentive-based and price-based programmes, have been used by utilities to induce customers to reduce their electricity consumption during peak periods. This study investigates the production decisions of a two-stage production system under these programmes in a situation where peak periods arrive randomly in the manufacturing cycle. Analytical results show that under demand-response programmes, the manufacturer, who aims at minimising the total operational cost, usually selects a lower production rate during peak periods and a higher one during non-peak periods. Notably, the uncertainty of the peak periods also has a significant influence on the manufacturer's production plans under these programmes. This paper further investigates the efficiency of different demand-response programmes in reducing the inventory holding cost and electricity cost. The results indicate that participating in the demand-response programmes does not always result in a higher inventory holding cost, which goes against the manufacturer's intuition about these programmes. In addition, this paper evaluates the manufacturers' preference for these demand-response programmes by comparing the operational cost savings generated from participating in the two programmes. It turns out that both the demand-response signals and the inventory holding cost substantially influence the manufacturer's willingness to participate in the programmes.