Allocating the cost of demand response compensation in wholesale energy markets

Summary form only given. Paying for load reductions results in a market, where the amount of resources sold is less than the amount of resources bought. To resolve this imbalance, ISOs must allocate the cost of compensating demand response to those who benefit from reduced LMPs. Current cost allocation methods are based on each energy buyer´s load share. In an uncongested network, this results in a “fair” allocation of costs, i.e. allocation proportional to the benefits each party accrues. However, in a congested network, this is no longer the case, as price separation occurs between nodes. In this paper, we propose a cost allocation based on LMP sensitivity that accounts for the effect of congestion. We also propose a means of allocating costs between load serving entities at a single node. Finally, we define a fairness index to evaluate the performance of the proposed method compared to load-based allocation. We find that when load reductions are small, the fairness index of the proposed method is very close to zero, indicating almost identical benefit to cost ratios for all market participants. Although the fairness index increases with increasing load reductions, even for larger load reductions, the fairness index is still lower for the proposed method.