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Mean–field moral hazard for optimal energy demand response management

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  • Romuald Élie
  • Emma Hubert
  • Thibaut Mastrolia
  • Dylan Possamaï

Abstract

We study the problem of demand response contracts in electricity markets by quantifying the impact of considering a continuum of consumers with mean–field interaction, whose consumption is impacted by a common noise. We formulate the problem as a Principal–Agent problem with moral hazard in which the Principal—she—is an electricity producer who observes continuously the consumption of a continuum of risk‐averse consumers, and designs contracts in order to reduce her production costs. More precisely, the producer incentivizes each consumer to reduce the average and the volatility of his consumption in different usages, without observing the efforts he makes. We prove that the producer can benefit from considering the continuum of consumers by indexing contracts on the consumption of one Agent and aggregate consumption statistics from the distribution of the entire population of consumers. In the case of linear energy valuation, we provide closed‐form expression for this new type of optimal contracts that maximizes the utility of the producer. In most cases, we show that this new type of contracts allows the Principal to choose the risks she wants to bear, and to reduce the problem at hand to an uncorrelated one.

Suggested Citation

  • Romuald Élie & Emma Hubert & Thibaut Mastrolia & Dylan Possamaï, 2021. "Mean–field moral hazard for optimal energy demand response management," Mathematical Finance, Wiley Blackwell, vol. 31(1), pages 399-473, January.
    • Handle: RePEc:bla:mathfi:v:31:y:2021:i:1:p:399-473
    DOI: 10.1111/mafi.12291
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    References listed on IDEAS

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    Cited by:

    1. René Carmona & Gökçe Dayanıklı & Mathieu Laurière, 2022. "Mean Field Models to Regulate Carbon Emissions in Electricity Production," Dynamic Games and Applications, Springer, vol. 12(3), pages 897-928, September.
    2. Alessandro Chiusolo & Emma Hubert, 2024. "A new approach to principal-agent problems with volatility control," Papers 2407.09471, arXiv.org.
    3. Camilo Hern'andez & Dylan Possamai, 2023. "Time-inconsistent contract theory," Papers 2303.01601, arXiv.org.
    4. Emma Hubert, 2023. "Continuous-time incentives in hierarchies," Finance and Stochastics, Springer, vol. 27(3), pages 605-661, July.
    5. Bastien Baldacci & Dylan Possamaï, 2022. "Governmental incentives for green bonds investment," Mathematics and Financial Economics, Springer, volume 16, number 5, March.
    6. Daniel Krv{s}ek & Dylan Possamai, 2023. "Randomisation with moral hazard: a path to existence of optimal contracts," Papers 2311.13278, arXiv.org.
    7. Yan Ding & Xiao Pan & Wanyue Chen & Zhe Tian & Zhiyao Wang & Qing He, 2022. "Prediction Method for Office Building Energy Consumption Based on an Agent-Based Model Considering Occupant–Equipment Interaction Behavior," Energies, MDPI, vol. 15(22), pages 1-31, November.

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