Internalizing Negative Externalities in Electricity Markets Using Demand Response Mechanisms

This paper tries to provide solutions for the externalities internalization by concentrating on the electricity demand side. A demand response based procedure aimed at internalizing negative externalities of generation units in the day-ahead electricity markets is presented. The proposed service adopts both price and quantity adjustments to internalize externalities. A discriminatory method for pricing the service, along with a bi-level optimization problem for determining the responsive demand fraction required to provide the service is considered. The consideration of the proposed method facilitates reaching the first-best optimal market solution. The numerical results illustrate the functioning of the proposed method