Incentive Compatible and Distributed Flexibility-Driven Electricity Markets

Wholesale electricity markets operate by the market-clearing mechanism where the price in each timeslot is determined by the per-unit cost of the marginal generator. Such pricing signals are valuable for guiding price-responsive loads into shifting energy consumption to low-price hours. However, efficiency is challenged by market power abuse by strategic generators manipulating the market towards maximizing their own profits. To deal with this, previous studies have proposed the employment of incentive-compatible mechanisms, namely the Vickrey-Clarke-Groves (VCG). However, the VCG mechanism directly calculates a payment for each participant, without featuring per-timeslot prices. Such absence of pricing signals obstructs the integration of price-responsive demand. In this paper, we design a distributed implementation of the VCG mechanism that iteratively asks participants to report their demand/generation for given prices. Thereby, we retain efficiency and incentive-compatibility for a system with strategic generators while allowing price-responsive demand to self-schedule. We further expose and study the trade-off between incentive compatibility and computational time, while simulation results demonstrate the proposition’s favorable performance against the current practice.