Incentive Compatible Pricing for Enhancing the Controllability of Price-Based Demand Response

Abstract

Price-based demand response is widely implemented by the load aggregators (LAs) to exploit the flexibility of massive demand-side resources. However, a key problem in real-life implementation is the controllability of price-based demand response, viz, whether the price can guide the demand to the desired value. To bridge this gap, this paper proposes a close-loop reverse Stackelberg game-based pricing method to better regulate the demand response. In the hierarchical game structure, the non-cooperative competition of heterogeneous demand-side resources in participating demand response constitutes the lower-level, while the determination of pricing policy by LA makes the upper-level. Towards a computationally efficient solution, the mean-field game is adopted to approximate the Nash equilibrium of the large-scale lower level competition, and the indirect formulation of close-loop reverse Stackelberg game is adopted. The accuracy of the approximation is proved to be the (1,2) -hierarchical equilibrium of the original game. Finally, a decentralized solution algorithm with sequential linear programming as outer-loop and mean-field iteration as inner-loop is proposed to price the demand response. Numerical tests on a retail electricity market containing 15,000 heterogeneous demand-side flexible resources validate the effectiveness of the proposed pricing scheme.