A market-based mechanism for providing demand-side regulation service reserves

We develop a market-based mechanism that enables a building Smart Microgrid Operator (SMO) to offer regulation service reserves and meet the associated obligation of fast response to commands issued by the wholesale market Independent System Operator (ISO) who provides energy and purchases reserves. The proposed market-based mechanism allows the SMO to control the behavior of internal loads through price signals and to provide feedback to the ISO. A regulation service reserves quantity is transacted between the SMO and the ISO for a relatively long period of time (e.g., a one hour long time-scale). During this period the ISO repeatedly requests from the SMO to decrease or increase its consumption. We model the operational task of selecting an optimal short time-scale dynamic pricing policy as a stochastic dynamic program that maximizes average SMO and ISO utility. We then formulate an associated non-linear programming static problem that provides an upper bound on the optimal utility. We study an asymptotic regime in which this upper bound is tight and the static policy provides an efficient approximation of the dynamic pricing policy. We demonstrate, verify and validate the proposed approach through a series of Monte Carlo simulations of the controlled system time trajectories.