Aggregating Distributed Energy Resources: Efficiency and Market Power

Abstract

The rapid expansion of distributed energy resources (DERs) is one of the most significant changes to electricity systems around the world. Examples of DERs include solar panels, small natural gas-fueled generators, combined heat and power plants, etc. Due to the small supply capacities of these DERs, it is impractical for them to participate directly in the wholesale electricity market. We study in this paper two efficient aggregation models. In the first aggregation model, a profit-maximizing aggregator procures electricity from DERs, and sells them in the wholesale market. We show that this model preserves full market efficiency, i.e., the social welfare achieved by the aggregation model is the same as that when DERs participate directly in the wholesale market. In the second aggregation model, a uniform two-part pricing policy is applied to DER owners, while the aggregator becomes fully regulated but is guaranteed positive profit. It is shown that this second model again achieves full market efficiency. Furthermore, we show that DER aggregation can also leads to a reduction on the market power of conventional generators. All arguments are supplemented with illustrative examples.