The demand for electricity of a particular location can vary significantly based on season, ambient temperature, time of the day etc. High demand can result in very high wholesale price of electricity. The reason for this is very short operating duration of peaking power plants which require large capital investments to establish. Those power plants remain idle for most of the time of a year except for some peak demand periods during hot summer days. This process is inherently inefficient but it is necessary to meet the uninterrupted power supply criterion. With the advantage of new technologies, demand response can be a preferable alternative, where peak reduction can be obtained during the short durations of peak demand by controlling loads. Some controllable loads are with thermal inertia and some loads are deferrable for a short duration without making any significant impact on users' lifestyle and comfort. Demand response can help to attain supply - demand balance without completely depending on expensive peaking power plants. In this research work, an incentive-based model is considered to determine the potential of peak demand reduction due to the participation of residential customers in a demand response program. Electric water heating and air-conditioning are two largest residential loads. In this work, hot water preheating and air-conditioning pre-cooling techniques are investigated with the help of developed mathematical models to find out demand response potentials of those loads. The developed water heater model is validated by comparing results of two test-case simulations with the expected outcomes. Additional energy loss possibility associated with water preheating is also investigated using the developed energy loss model. The preheating temperature set-point is mathematically determined to obtain maximum demand reduction by keeping thermal loss to a minimal level. Case studies are performed for 15 summer days to investigate the demand response potential of water preheating. Similarly, demand response potential associated with pre-cooling operation of air-conditioning is also investigated with the help of the developed mathematical model. The required temperature set-point modification is determined mathematically and validated with the help of known outdoor temperature profiles. Case studies are performed for 15 summer days to demonstrate effectiveness of this procedure. On the other hand, total load and demand response potential of a single house is usually too small to participate in an incentive-based demand response program. Thus, the scope of combining several houses together under a single platform is also investigated in this work. Monte Carlo procedure-based simulations are performed to get an insight about the best and the worst case demand response outcomes of a cluster of houses. In case of electrical water heater control, aggregate demand response potential of 25 houses is determined. Similarly, in case of air-conditioning control (pre-cooling), approximate values of maximum, minimum and mean demand reduction amounts are determined for a cluster of 25 houses. Expected increase in indoor temperature of a house is calculated. Afterwards, the air-conditioning demand scheduling algorithm is developed to keep aggregate air-conditioning power demand to a minimal level during a demand response event. Simulation results are provided to demonstrate the effectiveness of the proposed algorithm. / Master of Science