An optimization approach for the design of time-of-use rates

Customized design of time-of-use (TOU) can be one building block for creating appropriate coordination mechanisms in the smart grid. This is because they mitigate the complexity arising from hourly real-time prices (RTP) while retaining the flexibility to match the underlying market dynamics. This way they can ensure both customer acceptance and coordination efficiency. This paper proposes a mixed-integer program (MIP) for optimal design of customized TOU rates. A marked difference to prior research in this area is the endogenous determination of the rate structure, that is the start and length of the time zones. The described approach provides a simple way to express rate structure requirements and to efficiently derive the corresponding optimal rate structure for different objective functions.