Demand response provides an opportunity for consumers to play a significant role in the operation of the electric grid by reducing or shifting their electricity usage during peak periods in response to time-based rates or other forms of financial incentives. Demand response programs are being used by electric system planners and operators as resource options for balancing supply and demand.
Such programs can lower the cost of electricity in wholesale markets, and in turn, lead to lower retail rates. Methods of engaging customers in demand response efforts include offering time-based rates such as time-of-use pricing, critical peak pricing, variable peak pricing, real time pricing, and critical peak rebates. It also includes direct load control programs which provide the ability for power companies to cycle air conditioners and water heaters on and off during periods of peak demand in exchange for a financial incentive and lower electric bills.

The electric power industry considers demand response programs as an increasingly valuable resource option whose capabilities and potential impacts are expanded by grid modernization efforts. For example, sensors can perceive peak load problems and utilize automatic switching to divert or reduce power in strategic places, removing the chance of overload and the resulting power failure.

Advanced metering infrastructure expands the range of time-based rate programs that can be offered to consumers and smart customer systems such as in-home displays or home-area-networks can make it easier for consumers to changes their behavior and reduce peak period consumption from information on their power consumption and costs.

These programs also have the potential to help electricity providers save money through reductions in peak demand and the ability to defer construction of new power plants and power delivery systems -- specifically, those reserved for use during peak times.