An Online Mechanism for Incorporating Demand Side Flexibility into the Smart Grid

Abstract

We propose an incentive compatible (IC) online mechanism for market integration of a flexible demand side in a smart grid with significant contribution from renewable energy sources (RES). This mechanism relies on the notion of energy services (Schweppe et al., 1989), i.e., combinations of appliances and associated time-wise load shifting potential. We compare this online mechanism over several metrics to an idealistic offline and online social planner. We find that the cost of establishing incentive compatibility in terms of social welfare is especially low in settings with high flexibility. This is a very positive result as we cannot expect classic welfare maximization approaches to compute realistic outcomes given self-interested agents. Under the IC mechanism, providing consumption flexibility decreases individual agents' payments and increases their chances of allocation. The presented online IC mechanism addresses a major obstacle for smart grid adoption, namely the lack of incentives fostering demand side flexibility. We see sufficient flexibility as an essential component in future power systems to facilitate higher RES penetration levels. Furthermore, we show that the classic paradigm of centralized control of flexible energy services offers only little societal benefits under our assumptions and can thus be replaced by a decentralized mechanism ensuring incentive-compatibility, scalability as well as robustness.

Keywords: OR in energy, Simulation, Smart Grid, Load Flexibility, Online Mechanism Design

JEL Classification: C79, D61, Q42