Unlocking distributed demand response efficiency for LMP-based electricity markets

This study addresses the challenges in the transition phase of demand response (DR) adoption, aiming to make DR mechanisms more appealing to aggregators and consumers in nodal electricity markets with Locational Marginal Pricing (LMP). During this phase, DR often operates separately from the electricity market, which can hinder its economic efficiency. We propose an optimal DR allocation procedure using a bilevel model, considering both the regulator's objective of maximizing economic impact and the day-ahead market's social welfare maximization with DR volumes. To tackle the complex nonlinear problem, we employ a linearization technique and reduction to a mixed-integer linear program (MILP). Our model is tested on a large-scale nodal electricity market, offering insights into geographically targeted DR deployment and reference pricing levels for regulators.