Econophysics of adaptive power markets: When a market does not dampen fluctuations but amplifies them

TL;DR

This paper challenges the assumption that adaptive power markets dampen fluctuations, showing through modeling that they can instead amplify fluctuations and cause large load swings due to consumer synchronization.

Contribution

It introduces a numerical econophysics model of adaptive power markets that does not rely on the averaging assumption, revealing potential amplification of fluctuations.

Findings

Adaptive pricing can amplify power fluctuations.

Correlated price noise leads to consumer synchronization.

Markets may cause larger load swings than expected.

Abstract

The average economic agent is often used to model the dynamics of simple markets, based on the assumption that the dynamics of many agents can be averaged over in time and space. A popular idea that is based on this seemingly intuitive notion is to dampen electric power fluctuations from fluctuating sources (as e.g. wind or solar) via a market mechanism, namely by variable power prices that adapt demand to supply. The standard model of an average economic agent predicts that fluctuations are reduced by such an adaptive pricing mechanism. However, the underlying assumption that the actions of all agents average out on the time axis is not always true in a market of many agents. We numerically study an econophysics agent model of an adaptive power market that does not assume averaging a priori. We find that when agents are exposed to source noise via correlated price fluctuations (as adaptive pricing schemes suggest), the market may amplify those fluctuations. In particular, small price changes may translate to large load fluctuations through catastrophic consumer synchronization. As a result, an adaptive power market may cause the opposite effect than intended: Power fluctuations are not dampened but amplified instead.