Compensation Mechanisms for Double Auctions in Peer-to-Peer Local Energy Markets

Abstract

This paper compares different double-auction pricing mechanisms in the context of peer-to-peer trading in local electricity markets. Benchmarking against the traditional system marginal price (SMP) approach, we analyze the outcomes of the Vickrey-Clarke-Groves (VCG) and Pay-as-bid (PAB) approaches, which lead to a revenue imbalance in the market. To mitigate this imbalance, we propose a set of mechanisms that impose trading fees or subsidies with different fairness policies and discuss their impact on the behavior of market participants. Proliferation of small-scale and distributed energy resources in low-voltage distribution systems has spurred the development of platforms for peer-to-peer local electricity trading. While recent studies prove that local electricity trading can be beneficial to both the peers and system, implementation of local energy markets is still in the early stages and there is no consensus on an optimal market design. This paper provides a detailed description of market properties for a competitive LEM that is cleared using the SMP, VCG, and PAB approaches. We show that the proposed compensation mechanisms effectively enforce predefined fairness policies and derive exact payments for each peer depending on market results and individual peer characteristics. The case study uses real-world data to illustrate that different compensation mechanisms can be used to incentivize desirable peer behavior, e.g., installation of new distributed energy resources, investment in grid supportive generation, or flexible energy usage.