Quantification of Market Power Mitigation via Efficient Aggregation of Distributed Energy Resources

TL;DR

This paper demonstrates that efficient aggregation of distributed energy resources (DERs) can significantly reduce the market power of conventional generators, improving social welfare and market efficiency.

Contribution

It provides a quantitative analysis of how DER aggregation mitigates generator market power and offers explicit formulas and numerical insights into this effect.

Findings

Market power gap is smaller with DERs present.

Efficient DER aggregation reduces social welfare loss.

Explicit expressions for welfare gaps are derived.

Abstract

Distributed energy resources (DERs) such as solar panels have small supply capacities and cannot be directly integrated into wholesale markets. So, the presence of an intermediary is critical. The intermediary could be a profit-seeking entity (called the aggregator) that buys DER supply from prosumers, and then sells them in the wholesale electricity market. Thus, DER integration has an influence on wholesale market prices, demand, and supply. The purpose of this article is to shed light onto the impact of efficient DER aggregation on the market power of conventional generators. Firstly, under efficient DER aggregation, we quantify the social welfare gap between two cases: when conventional generators are truthful, and when they are strategic. We also do the same when DERs are not present. Secondly, we show that the gap due to market power of generators in the presence of DERs is smaller than the one when there is no DER participation. Finally, we provide explicit expressions of the gaps and conduct numerical experiments to gain deeper insights. The main message of this article is that market power of conventional generators can be mitigated by adopting an efficient DER aggregation model.