This paper reviews market-related problems of modern electric grids and possible solutions to address them. In particular, one techno-economical solution, namely residential demand response programs enabled by a smart grid, is analyzed and modeled in detail. The implications of this solution from both economic and policy perspectives are discussed.
The analysis results in several insights: first a local optimum does not generally lead to a global optimum, especially for complex markets; second, in this approach, there exists a disconnection between the locus of the problem (electric utilities) and the locus of the solution (change of demand); third, any techno-economic solution must be carefully designed and global impact should be evaluated to ensure that the final objective is achieved; and fourth, two-way communication is an essential requirement for the successful deployment of smart grids.