Incentive design for demand-side flexibility in transmission system operation: A bi-level market equilibrium approach

Increasing renewable electricity generation and the electrification of industry, mobility, and heating through sector coupling pose significant challenges to grid operators in maintaining secure and reliable system operations. Demand-side sector coupling applications increase electricity demands and stress electricity grids, but they also offer transmission system operators increased flexibility for congestion management. Due to the complexity of directly controlling decentralized demand-side technologies, incentive mechanisms present a promising solution for harnessing demand-side flexibility. This study investigates various incentive schemes that encourage grid-supportive demand-side behavior, focusing on heat pumps by developing a bi-level programming framework. The framework models the decision-making processes of key stakeholders, including a TSO, an aggregator, and a market clearing agent, considering model-endogenous wholesale market equilibrium formation and congestion management optimization. The economic efficiency of different design options for grid congestion management is evaluated using an extended IEEE test system adjusted to an exemplary German market configuration. The findings highlight the critical importance of time-dynamic premium design concepts due to the variability of renewable generation. While incentive-based market interventions increase electricity market costs and thereby shift consumer rents to producers, the reduced transmission system operation cost leads to overall gains in total system welfare.