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Aggregating Distributed Energy Resources: Efficiency and Market Power

Author

Listed:
  • Zuguang Gao

    (Paul Merage School of Business, University of California, Irvine, Irvine, California 92697)

  • Khaled Alshehri

    (Control and Instrumentation Engineering Department, King Fahd University of Petroleum and Minerals, Dhahran, 31261, Saudi Arabia; Interdisciplinary Research Center for Smart Mobility and Logistics, King Fahd University of Petroleum and Minerals, Dhahran, 31261, Saudi Arabia)

  • John R. Birge

    (The University of Chicago Booth School of Business, Chicago, Illinois 60637)

Abstract

Problem definition : The rapid expansion of distributed energy resources (DERs) is one of the most significant changes to electricity systems around the world. Examples of DERs include solar panels, electric storage, thermal storage, and combined heat and power plants. Because of the small supply capacities of these DERs, it is impractical for them to participate directly in the wholesale electricity market. We study in this paper the question of how to integrate these DER supplies into the electricity market, with the objective of achieving full market efficiency. Methodology/results : We study four aggregation models, where there is an aggregator who, with the knowledge of DERs’ utility functions and generations, procures electricity from DERs, and sells them in the wholesale market. In the first aggregation model, a profit-maximizing aggregator announces a differential two-part pricing policy to the DER owners. We show that this model preserves full market efficiency, that is, the social welfare achieved by this model is the same as that when DERs participate directly in the wholesale market. In the second aggregation model, the profit-seeking aggregator is forced to impose a uniform two-part pricing policy to prosumers from the same location, and we numerically show that there can be large efficiency loss. In the third (fourth) aggregation model, a uniform (semiuniform) two-part pricing policy is applied to DER owners, whereas the aggregator becomes fully regulated but is guaranteed nonnegative (positive) profit. It is shown that these models again achieve full market efficiency. Furthermore, we show that DER aggregation also leads to a reduction in the market power of conventional generators. Managerial implications : DER aggregation via profit-seeking and/or regulated aggregators has been investigated by California Independent System Operator and New York Independent System Operator, among others, and the recent Federal Energy Regulatory Commission Order No. 2222 paved the way for aggregators to bid in the wholesale market. Our four aggregation models may shed light on how DERs should be included in the wholesale electricity market.

Suggested Citation

  • Zuguang Gao & Khaled Alshehri & John R. Birge, 2024. "Aggregating Distributed Energy Resources: Efficiency and Market Power," Manufacturing & Service Operations Management, INFORMS, vol. 26(3), pages 834-852, May.
    • Handle: RePEc:inm:ormsom:v:26:y:2024:i:3:p:834-852
    DOI: 10.1287/msom.2021.0539
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    References listed on IDEAS

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    4. Shi, Yong-Heng & Zhao, Tao & Xie, Bai-Chen & Hao, Peng, 2025. "Navigating uncertain generation: The impact of regulation on distributed photovoltaic green electricity trading market participation," Energy Economics, Elsevier, vol. 151(C).

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