An Incentive-Based Settlement Mechanism for Participation of Flexible Demands in Day-ahead Markets

The recent energy policy trends towards expanding the penetration of variable renewable energy sources in electricity generation sector brings about new short/long term challenges for operation/planning of power systems. Due to the significant variability and uncertainty of electricity production by these resources, system operators may require additional flexibility resources to continuously balance supply and demand and to preserve power system security under high penetration of renewables. In this paper, the participation of flexible demands in day-ahead market under high share of renewables (in particular wind generation) is modelled through a two-stage stochastic program which takes into account the day-ahead prediction error of wind production. Demand-side flexibility is modelled as load shifting capability, without affecting the total electricity demand per day. An incentive payment mechanism to settle the flexible demands in the day-ahead market is proposed which provides additional revenue for consumers and motivates them to provide flexibility. The incentive rate is set by the system operator, while the accepted consumers to receive this incentive are selected through the market mechanism, according to the additional value of the provided flexibility compared to the cost of providing the incentives. Finally, the maximum incentive which can be paid to flexibility providers under different levels of demand-side flexibility is investigated on the conceptual test case of this study.