Pricing of Fluctuations in Electricity Markets

TL;DR

This paper introduces a dynamic pricing mechanism for electricity markets that incentivizes consumers to reduce demand fluctuations, aiming to improve social welfare and reduce reliance on peaking power plants amid increasing renewable integration.

Contribution

It proposes a novel dynamic pricing scheme based on a game-theoretic model that asymptotically achieves social optimality by properly pricing demand variability.

Findings

Pricing mechanism encourages demand shifting.

Reduces need for peaking power plants.

Achieves social optimality asymptotically.

Abstract

In an electric power system, demand fluctuations may result in significant ancillary cost to suppliers. Furthermore, in the near future, deep penetration of volatile renewable electricity generation is expected to exacerbate the variability of demand on conventional thermal generating units. We address this issue by explicitly modeling the ancillary cost associated with demand variability. We argue that a time-varying price equal to the suppliers' instantaneous marginal cost may not achieve social optimality, and that consumer demand fluctuations should be properly priced. We propose a dynamic pricing mechanism that explicitly encourages consumers to adapt their consumption so as to offset the variability of demand on conventional units. Through a dynamic game-theoretic formulation, we show that (under suitable convexity assumptions) the proposed pricing mechanism achieves social optimality asymptotically, as the number of consumers increases to infinity. Numerical results demonstrate that compared with marginal cost pricing, the proposed mechanism creates a stronger incentive for consumers to shift their peak load, and therefore has the potential to reduce the need for long-term investment in peaking plants.