A Two-Stage Mechanism for Demand Response Markets

Abstract

We present a two-stage mechanism for creating markets for demand response. Demand response involves system operators using incentives to modulate electricity consumption around peak hours or when faced with an incidental supply shortage. However, system operators typically have imperfect information about their customers' counterfactual consumption, that is, their consumption had the incentive been absent. The standard approach to estimate the reduction in a customer's electricity consumption then is to estimate their counterfactual baseline. However, this approach is not robust to estimation errors or strategic exploitation by the consumers and can potentially lead to overpayments to customers who do not reduce their consumption and underpayments to those who do. In addition, the incentive payments are often designed based on models of consumer behavior or other ad-hoc rules that are only partially accurate at best. The two-stage mechanism proposed in this paper circumvents the aforementioned issues. In the dayahead market, the participating loads submit the probability distribution of their next-day consumption. In real-time, if and when called upon for demand response, the loads report the realization of their baseline demand and receive credit for reductions below their reported baseline. The mechanism guarantees ex post incentive compatibility of truthful reporting of the probability distribution in the day-ahead market and truthful reporting of the realized baseline demand in real-time. The mechanism can be viewed as an extension of the celebrated Vickrey-Clarke-Groves mechanism augmented with a carefully crafted second-stage penalty for deviations from the day-ahead bids.

Online Learning for Incentive-Based Demand Response

“…Baseline reporting approaches were proposed in [9], [10], [21], [22] as an alternative baseline estimation method. These approaches employ the framework of mechanism design to design payment and selection schemes to ensure that the consumers report the correct baseline values.…”

“…There have have been reported cases in the past where the participants have artificially inflated their baseline for increasing payments [7]. Another class of approaches are based on mechanism design, where the consumers are elicited to report their baselines [8]- [10]. These approaches rely on suitably designed payment schemes to ensure that the manipulation or gaming of the reporting is minimal.…”