Design of Incentive Mechanisms Using Prospect Theory to Promote Better Sell-back Behavior among Prosumers

TL;DR

This paper proposes a prospect theory-based incentive mechanism for prosumers to enhance sell-back behavior, demonstrating that lottery-based mechanisms outperform traditional contract pricing in increasing sell-back amounts and retailer savings.

Contribution

It introduces a novel prospect theory approach to designing incentive mechanisms for prosumers, improving sell-back behavior over existing expected utility-based methods.

Findings

Lottery-based mechanism increases sell-back amount.

Prospect theory-based incentives outperform expected utility models.

Enhanced retailer savings with lottery mechanisms.

Abstract

Users can now give back energies to the grid using distributed resources. Proper incentive mechanisms are required for such users, also known as prosumers, in order to maximize the sell-back amount while maintaining the retailer's profit. However, all the existing literature considers expected utility theory (EUT) where they assume that prosumers maximize their expected payoff. We consider prospect theory (PT) which models the behavior of humans in the face of uncertainty in a better manner. We show that in a day-ahead contract pricing mechanism, the actual optimal value of contract and the sell-back amount may be smaller compared to the one computed by the EUT. We also propose a lottery-based mechanism and show that such a mechanism can increase the sell-back amount while increasing the retailer's savings compared to day-ahead contract pricing.