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Power companies such as Southern California Edison (SCE) uses Demand Response(DR) contracts to incentivize consumers to reduce their power consumptionduring periods when demand forecast exceeds supply. Current mechanisms in useoffer contracts to consumers independent of one another, do not take intoconsideration consumers' heterogeneity in consumption profile or reliability,and fail to achieve high participation.  We introduce DR-VCG, a new DR mechanism that offers a flexible set ofcontracts (which may include the standard SCE contracts) and uses VCG pricing.We prove that DR-VCG elicits truthful bids, incentivizes honest preparationefforts, enables efficient computation of allocation and prices. With simplefixed-penalty contracts, the optimization goal of the mechanism is an upperbound on probability that the reduction target is missed. Extensive simulationsshow that compared to the current mechanism deployed in by SCE, the DR-VCGmechanism achieves higher participation, increased reliability, andsignificantly reduced total expenses.

Contract Design for Energy Demand Response