Pricing for TSO-DSO Coordination: A Decentralized Incentive Compatible Approach

High-penetration of distributed energy resources (DERs) requires the coordinated operation of transmission and distribution systems. Different from most conventional studies, this work regards the distribution system operators (DSOs) as rational individuals, whose profit-seeking behaviors may be in conflict with the dispatch decisions of the transmission system operator (TSO). To bridge this gap, this paper proposes a market-based TSO-DSO coordination approach. Firstly, the structure and clearing process of the proposed pricing mechanism is proposed. Then, based on the individual rationality analysis, the incentive incompatibility of wholesale electricity market with the participation of DSOs is proved. Thus, uplift payments are required to incentivize the DSOs to follow the dispatch decisions of TSO. To minimize the total uplift payments in the electricity market, a transmission-and-distribution incentive compatible pricing (T&D-ICP) mechanism is proposed. Further, to preserve the individual privacy, a decentralized T&D-ICP model is reformulated and iteratively solved based on the relaxed based bi-level reformulation and decomposition (RBRD) algorithm. In the iterative process, strict privacy preservation is achieved. Comparisons of T&D-ICP with locational marginal pricing (LMP) and convex hull pricing (CHP) are conducted on T30D0, T30D2, T30D9 and T118D30 test systems. The simulation results validate the high computation efficiency, strict privacy preservation, and limited burden on the communication of the proposed T&D-ICP mechanism.