As power systems increasingly rely on renewable energy, grid services traditionally supplied by central plants must increasingly be sourced from distributed energy resources (DERs). Virtual power plants (VPPs) aggregate DERs to act as a single entity, but coordination is complicated by information asymmetry, possibly resulting in strategic behaviour. This thesis studies how we can design a mechanism for a commercial VPP, having to satisfy a fixed commitment, while optimising the revenue from the VPP operator.
We first develop a tractable, multi-period VPP model with linear costs, local and temporal constraints for DERs and soft system-wide commitments enforced via deviation penalties. On top of this model we design and compare four mechanisms: first-price sealed bid (FPSB), uniform pricing, Vickrey–Clarke–Groves (VCG) and Arrow–d’Aspremont– Gerard-Varet (AGV). We evaluate them on revenue optimality, weak budget balance, incentive compatibility, individual rationality and scalability. Furthermore, we investigate how the composition of a VPP’s portfolio could inform mechanism design choices. FPSB realises payments equalling costs under truthful reports and remains competitive for small strategic fractions, but overpayment grows with the share of strategic agents and with cost dispersion. Uniform pricing is comparatively insensitive to the strategic fraction but highly sensitive to cost dispersion, often leading to large overpayments. VCG is strategy-proof and insensitive to strategic behaviour, yet externality payments increase with cost dispersion and raise total payouts. AGV keeps the payment-to-cost ratio near or below one by relying on expected externalities and scaling, improving operator viability but potentially violating individual rationality in instances. These results yielded the following guidelines regarding the suitability of mechanisms. FPSB for low strategic participation, uniform pricing for homogeneous portfolios, VCG when truthfulness is vital and external funding is possible, and AGV when operator viability is the hard constraint with safeguards for individual rationality.F

In the electricity system, one barrier to the energy transition is the degradation of frequency stability due to the decrease of system inertia and frequency control ancillary services (FCAS), which is caused by the replacement of inertia-abundant and governor-based conventional power plants with zero-inertia and inverter-based renewable energy sources (RES).

There are already inverter technologies for RES and battery energy storage systems (BESS) to provide virtual inertia (VI) and fast frequency response (FFR) services, which are equivalent to physical inertia and conventional FCAS. Potential providers include wind, solar, battery energy storage systems (BESS), and other types of devices with the feature of energy storage. However, there are non-technical barriers to the actual implementation. For example, in most parts of the world, these services cannot participate in the electricity market and thus there is a lack of incentive for both the provision of and investment in the VI and FFR.

In the literature, there are already proposals of possible market designs for VI and FFR that procure the services, guarantee the frequency-stability requirements, and provide payments to the service provider. The main focal point is on the formulation of security-constrained unit commitment (SCUC) and security-constrained economic dispatch (SCED) problems. The formulation needs to be accurate in modeling, be solvable, and be with reasonable computational burden. Most of them only considered the allocation of ancillary services but did not price them, or price them but only by directly assigning a shadow price. Only a few works considered explicit prices in the bid.

In this project, we consider a market design with explicit bid prices. In the SCUC and SCED problems, we adopt the state-of-the-art formulation of frequency nadir constraint and method of modeling the frequency dynamics based on the linear ramp assumption of the dynamics of frequency response (FR). With these methodologies, we will investigate the features of such a market by identifying inter-dependencies of parameters in the market setups, including the interaction between the bid price and bid amount of FR and VI, and analyzing the underlying mechanisms. The results show that the amount of FR sold depends on the bid price of FR monotonously and the amount of VI sold depends on the bid price of VI monotonously, though with different patterns. The underlying reason for such dependencies is that FR, VI, and the size of the largest unit both help mitigate frequency drop and recover it and they are influencing each other. The price of FR or VI decides the relative worthiness of each option. The size of the largest unit is also related to the amount of FR sold, which is confirmed by the formulation of the analytical nadir and the QSS constraint. However, the way that the amount of available FR influences the amount of VI sold does not show a clear pattern.

These findings provide insights into the interactions between the FR and VI products and thus provide a reference for the design of the FCAS market.