The incentive announcement effect of demand response on market power mitigation in the electricity market

The incentive announcement effect of demand response (DR), which can mitigate exercising of market power, was assessed using a game theory method. To analyze player behaviors, the profit functions of generation companies, DR consumers, and normal consumers were formulated and their best response functions derived. Because the implementation method of a pre-announced DR incentive with game theory has not been studied before, a sequential game that can make a normal consumer a leader was considered. The leader's strategy, i.e., the incentive level, is determined by a neutral agent to prevent overuse of the demand resource. With this procedure, market equilibrium can be obtained by solving the Stackelberg game. An analytical solution for market equilibrium was derived for a simple case; simulations were used to confirm the maintenance of tendencies in a more complex case. As a result, the market clearing price was reduced and a fairer distribution of the surplus was achieved compared with the result of the oligopoly condition case. This indicates that the exercise of market power is affected by the incentive announcement procedure and market power can be mitigated.