Helping end-users help each other: Coordinating development and operation of distributed resources through local power markets and grid tariffs

There is an ongoing transition in the power system towards an increasing amount of flexible resources and generation technologies at the distribution system level. An appealing alternative to facilitate efficient utilization of such decentralized energy resources is to coordinate the power at the neighbourhood level. This paper proposes a game-theoretic framework to analyze a local trading mechanism and its feedback effect on grid tariffs under cost recovery conditions for the distribution system operator. The novelty of the proposed framework is to consider both long-term and short-term aspects to evaluate the socio-economic value of establishing a local trading mechanism. Under our assumptions, the main finding is that the establishment of local electricity markets can decrease the total costs by facilitating coordination of resources and thus create higher socio-economic value than the uncoordinated solution. Furthermore, a sensitivity analysis on the tariff levels reveals that there are two equilibrium solutions, one where the grid costs are exactly balanced by tariff income and one where the neighbourhood decides to disconnect from the larger power system. These results indicate that although a local trading mechanism can reduce the need for grid capacity, it may not be cost optimal for neighbourhoods to become completely self-sufficient.