An Incentive Compatible Market Mechanism for Integrating Demand Response into Power Systems

In this paper, we propose a market mechanism that allows demand response providers (DRPs) to participate in a two-settlement electricity market as power suppliers alongside conventional generators. Each DRP bids her demand reduction capacity and cost rate, and the independent system operator (ISO) schedules the power dispatch to minimize the overall system cost. We show that, with the proposed mechanism, truthful bidding by the DRPs is achieved at a Nash equilibrium (NE), and as a result, the social welfare is maximized. The theoretical results are corroborated by simulation studies.