The Optimal Mechanism Design of Retail Prices in the Electricity Market for Several Types of Consumers

Natalia Aizenberg and Nikolai Voropai
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Natalia Aizenberg: Department of Electric Power System, Melentiev Energy Systems Institute SB RAS, 664033 Irkutsk, Russia
Nikolai Voropai: Department of Electric Power System, Melentiev Energy Systems Institute SB RAS, 664033 Irkutsk, Russia

Mathematics, 2021, vol. 9, issue 10, 1-25

Abstract: In this paper, we discuss the demand side management (DSM) problem: how to incentivize a consumer to equalize the load during the day through price-dependent demand. Traditionally, the retail market offers several electricity payment schemes. A scheme is effective when the different tariffs satisfy different consumers. At the same time, the existing and generally accepted retail pricing schemes can lead to an "adverse selection" problem when all consumers choose the same price, thereby, reducing the possible general welfare. We propose an optimal design of pricing mechanisms, taking into account the interests of the electricity supplier and different types of consumers. The results of our work are that the optimal mechanism is implemented simultaneously for several periods, including the case when the ratio of types of consumers in periods changes. In addition, the mechanism proposed by us, in contrast to the studies of other researchers, provides an equilibrium close to the socially optimal maximum. We describe the implementation algorithm of the mechanism and provide examples of its action in the electric power system with different types and numbers of consumers.

Keywords: retail electricity market; mechanism design; adverse selection; equilibrium optimization methods; compatibility construct; game theory; equilibrium; active consumer; electrical load (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2021
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