Near-optimal demand side management for retail electricity markets with strategic users and coupling constraints

Abstract The main objective of Demand Side Management (DSM) is to achieve an aggregated consumption pattern that results to energy cost reduction, welfare maximization and/or satisfaction of network constraints. This is generally pursued by encouraging electricity use at low-peak times and is a well-studied problem for the case of price-taking consumers. In this paper, however, we consider a system with strategic, price-anticipating consumers with private preferences that choose their electricity consumption patterns so as to maximize their own benefit. In this context, we take on the problem of coordinating the strategic consumers’ consumption behavior so as to satisfy system-wide constraints without sacrificing their welfare. To do so, we draw on concepts of indirect mechanism design and propose a novel DSM architecture that is able to bring the system to Nash Equilibrium. The proposed scheme preserves both the budget-balance and the individual rationality properties. According to our evaluation, the proposed DSM architecture achieves a close to optimal allocation (1%–3% gap), compared to an “optimal” system that would use central optimization of user loads without user consensus or protection of their privacy.