Algorithm for optimal real-time pricing based on switched Markov chain models

Real-time pricing is one of the key strategies in demand response. In this paper, a new theoretical framework for real-time pricing is proposed based on a switched Markov chain model. First, a switched Markov chain model is introduced, and the behavior of air-conditioners is modeled as an example. Next, the pricing problem is formulated as the optimal control problem, and its solution method is proposed. In addition, an on-line algorithm for real-time pricing is presented. Finally, the effectiveness of the proposed method is presented by a numerical simulation. The proposed method provides us a basic framework for real-time pricing of electricity.