Power market reform in the presence of flexible schedulable distributed loads. New bid rules, equilibrium and tractability issues

We investigate the shortcomings of current day-ahead-market designs in eliciting socially optimal demand response and obtaining regulation service reserve offers from flexible loads. More specifically, we show that under the current day-ahead-market rules, individual flexible loads have the perverse incentive to self-schedule based on their estimate of market clearing price trajectories, rather than reveal their true utility. Furthermore, convergence of estimated market clearing prices to the socially optimal equilibrium, although theoretically feasible in a carefully designed iterative approach, is quite impractical for the application at hand. We propose modified market rules that remove the perverse incentives and allow the market to clear and discover the socially optimal equilibrium prices which are stable w.r.t. individual self-dispatch. We prove our claims and verify them with extensive numerical investigation.