Exploring Integrated Demand Elasticity for Market Power Mitigation

Abstract

In the deregulated markets across the world, the marginal pricing (MP) mechanism is widely adopted. However, this mechanism is known to lose market efficiency when units exercise market power to earn more profits. Most of the existing literature focuses on the design of incentive-compatible market mechanism or market regulation policy to mitigate market power for generation. In this paper, we first explore the role of integrated demand elasticity for market power mitigation. A bi-level optimization framework of integrated demand response (IDR) is developed considering the complementary of energy conversion. On the first level, an economic dispatch model is formulated aiming to minimize the total costs of electric power system operation. On the second level, an IDR model is developed, which enables energy users to flexibly switch the source of consumed energy, including natural gas and hydrogen, etc. We propose a solution algorithm that converts the bi-level model into a single-level optimization model by using Karush-Kuhn-Tucker (KKT) conditions. Then the mixed-integer linear programming model can be embedded in the economic dispatch model. Case studies based on the IEEE 30-bus system demonstrate that IDR can significantly improve demand elasticity, and thus effectively mitigate the strategic incentive of thermal generators.