The present invention relates to a new incentive-based demand response method which allows a power grid operator to distribute a demand response resource at a system level. A demand response model according to the present invention extends to three classes of the power grid operator (GO), a plurality of service providers (SP) and a consumer. The power grid operator firstly delivers an incentive to the service provider. The service provider operates a subprogram by providing the incentive and negotiates a demand reduction amount with the registered consumer. In a perspective of a hierarchical decision structure, a two-loop stackelberg game is proposed to an interaction between different subjects. Existence of only one stackelberg equilibrium providing an optimal system solution is proved. A simulation shows that the present invention is effective to compensate lack of the system resource at minimum costs.
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