Modelling demand response in organized wholesale energy markets

We propose a bi-level optimization model for demand response in organized wholesale energy markets. In this model, the lower level performs the economic dispatch of energy and generates the price and the upper level minimizes the total amount of demand response subject to a net benefit requirement. In an economic sense, demand response is a trade of ‘consuming rights’ instead of a sale of energy. Therefore it must be traded separately from the energy market. Although a bi-level optimization model is very hard to solve in general, we demonstrate that realistic power networks have characteristics that can be exploited to reduce the effective size of the problem instance. In particular, we transform the nonconvex net benefit test constraint to an equivalent linear form, and reformulate the nonconvex complementarity conditions of doubly bounded variables using SOS2 constraints. For realistic instances of the MPEC, we employ a three-phase approach that exploits the fast local solution from a nonlinear programming solver as well as LP-based bound strengthening within a mixed integer/SOS2 formulation. The model is tested against various data cases and settings, and generates useful insight for demand response dispatch operations in practice.