Penalty mechanism in transactive energy: A mechanism design approach for day-ahead markets

Ensuring incentive compatibility mechanisms to enforce market obligations is crucial in deploying a transactive energy system. While previous studies have reported adopting penalty mechanisms for market compliance, these studies did not generally analyse the incentive compatibility property of mechanism design. Neglecting this mechanism design property can lead to inefficient market outcomes and economic losses for system operators. This paper analyses self-enforcing policies to verify whether they comply with the incentive compatibility property in a one-shot market architecture. Additionally, it provides a comprehensive introduction to the phases of mechanism design – ex-ante , interim , and ex-post – and their relationship with key design principles: individual rationality, efficiency, budget balance, and incentive compatibility, highlighting expected outcomes at each phase. A case study demonstrates how a strategy-proof mechanism significantly influences individual rationality, efficiency, and budget balance, offering practical insights for improving decision-making frameworks in electricity markets. Moreover, the findings reveal that adopting a non-strategy-proof mechanism undermines the long-term viability of transactive energy systems. This work provides actionable recommendations for system operators and policymakers on implementing mechanisms that prevent strategic behaviour from agents. • Transactive energy offers new economic opportunities to customers. • Customers are encouraged to adopt agent-based technology for optimized negotiations. • Rational and intelligent agents may exploit misbehaviours for economic gain. • Agents’ misbehaviour must be prevented for a successful transactive energy deployment. • This work addresses fundamental concepts of mechanism design.