Pricing algorithms for the day-ahead electricity market with flexible consumer participation

In this paper, we consider the design of the day-ahead market for the smart electrical grid. Consumers with flexible demand and generator companies participate in the market to settle on their load and supply schedules, respectively. The market is operated by an Independent System Operator (ISO) whose purpose is to maximize social welfare while keeping load and supply balanced in the electricity network. We develop two distributed pricing algorithms that achieve optimum welfare. The first algorithm yields time-dependent market prices under convexity assumptions on utility and cost functions and the second algorithm yields bundle prices for arbitrary utility and cost functions. In both algorithms, flexible consumers and generator companies simply determine their own schedules based on the prices updated by the ISO at each iteration. We show that the participation of flexible demand in the day-ahead market reduces supply volatility, which would be present when flexible demand does not take part in price setting procedure.