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The increasing demand for electricity especially during the peak hours threaten the grid reliability. Demand response (DR), changing the load pattern of the consumer in response to system conditions, can decrease energy consumption during periods of high wholesale market price and also maintain system reliability. Residential homes consume 38% of the total electric energy in the U.S., making them promising for DR participation. Consumers can be motivated to participate in DR programs by providing incentives (incentive-based DR), or by introducing a time-varying tariff for electricity consumption (price-based DR). A home energy management system (HEMS), an automated system which can alter the residential consumer’s energy consumption pattern based on the price of electricity or financial incentives, enables the consumers to participate in such DR programs. HEMS also should consider consumer comfort during the scheduling of the heating, ventilation, and air conditioning (HVAC) and other appliances. As internal heat gain of appliances and people have a significant effect in the HVAC energy consumption, an integrated HVAC and appliance scheduling are necessary to properly evaluate potential benefits of HEMS. This work presents the formulation of HEMS considering combined scheduling of HVAC and appliances in time-varying tariff. The HEMS also considers the consumer comfort for the HVAC and appliances while minimizing the total electricity cost. Similarly, the HEMS also considers the detailed building model in EnergyPlus, a building energy analysis tool, to evaluate the effectiveness of the HEMS. HEMS+, a communication interface to EnergyPlus, is designed to couple HEMS and EnergyPlus in this work. Furthermore, a co-simulation framework coupling EnergyPlus and GridLAB-D, a distribution system simulation tool, is developed. This framework enables incorporation of the controllers such as HEMS and aggregator, allowing controllers to be tested in detail in both building and power system domains. Lack of coordination among a large number of HEMS responding to same price signal results in peak more severe than the normal operating condition. This work presents an incentive-based hierarchical control framework for coordinating and controlling a large number of residential consumers’ thermostatically controlled loads (TCLs) such as HVAC and electric water heater (EWH). The potential market-level economic benefits of the residential demand reduction are also quantified.