Game-theoretic analysis of market-based operation mechanism for demand response resources

•A market-based operation mechanism for DR resources is presented.•Incentive compensation is introduced to encourage DRA to participate in DA market.•A game-theoretic model for interaction between DA and DRX markets is proposed.•The existence and uniqueness of the Nash equilibrium is theoretically demonstrated.•A distributed algorithm is proposed to find the equilibrium outcomes. While it is well recognized that demand response (DR) can improve efficiency of the wholesale electricity market, many challenges remain to be addressed regarding DR resources’ market-based operation mechanisms and specifically, how to encourage DR resources to participate in the wholesale electricity market. This paper presents a market-based operation mechanism for DR resources to participate in a day-ahead wholesale electricity market. A specific DR exchange (DRX) market is built for a demand response aggregator (DRA) to trade DR resources with DR providers, and the DRA can bid strategically and compete with other participants in the wholesale electricity market. In order to encourage the DRA to participate in the wholesale market, an incentive compensation method is also introduced, in which the DRA can receive payment from retailers because retailers earn extra profits from the DRA’s participation in the wholesale market. To examine the effectiveness of the mechanism, a game-theoretic model for the interaction among participants in the wholesale electricity market and the DRX market is proposed. In this model, the supply function bid form is employed by both the DRA and generators in the wholesale market, and also by the DR providers in the DRX market. The existence and uniqueness of the Nash equilibrium is demonstrated analytically. In addition, in order to tackle the information asymmetry in practical application, a distributed algorithm is developed to obtain the equilibrium outcomes. Finally, the effectiveness of the proposed model and algorithms is validated by numerical examples. It is also shown that in the proposed market-based operation mechanism, the DRA has an incentive to voluntarily participate in the competition of the wholesale electricity market.