Annual demand response procurement method using an options contract technique — A planning tool

Abstract

Usually independent system operators (ISOs) procure demand response (DR) services using a non-competitive incentive-based process. Further, DR payments are divided into capacity and performance payments without a scientific basis.Volatility in market clearing price may arise for a multitude of reasons such as demand outstripping scheduled generation capacity and the use of expensive generation in such situations. The causes for these situations include uncertainty in generation such as from renewables, uncertainty in demand due to erratic customer behaviour, an unreliable generation fleet causing frequent failures, etc.In this paper, a planning tool is proposed which incorporates a market-based algorithmic annual DR procurement model to manage peak demand and volatile prices in electricity markets. DR services are procured via an options contract mechanism, providing a scientific basis for disaggregating DR payments into premium and strike prices, which relate to capacity and performance payments for DR services respectively.In the first phase, the method computes price volatility in an electricity market without DR. In the second phase, an annual DR procurement model is formulated and solved as a year-long mixed-integer linear optimization challenge, considering bids from generators and DR vendors, to determine hourly market clearing prices (MCPs). This formulation assumes bids from generators and demand. Finally, in the third phase, using an options contract model and considering price volatility determined in the first phase, MCPs determined in the second phase are disaggregated into capacity and performance payments.The proposed method is tested on IEEE 6-bus and modified 118-bus systems to demonstrate its benefits of: (1) providing a competitive DR procurement process, and (2) enabling ISOs to correlate price volatility to capacity and performance payments. The studies show that a larger volatility in prices results in their increased apportioning to capacity payments.