U.S. policy is to allow owners of distributed resources to effectively and reliably provide their services at scale, and operate harmoniously on an interconnected distribution and transmission grid. Accordingly, regulation, new business models and technology advances over the past decade have led to significant growth rates in distributed energy resources including generation, responsive demand, energy conservation and customer adoption of industrial, commercial and residential energy management systems. The result is that several regions are reaching proposed capacity levels for distributed generation that exceed traditional operating and engineering practices for distribution systems. At the same time, policies advocating wholesale spot prices to customer devices (“prices to devices”) have not adequately considered distribution system reliability impacts or relationship to distributed generation. As such, it is also not clear that current market models or regulations are entirely adequate or appropriate for the several emerging hybrid regional markets, such as California, with millions of distributed energy resources envision by the year 2020

Bitar, E.

De Martini, Paul

Meyn, S.

Wierman, Adam

Caltech Authors - Main

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Integrated Distributed Energy Resource Pricing and Control 
  
 
P. DE MARTINI1 A. WIERMAN      S. MEYN       E. BITAR      
     Caltech               Caltech       Univ. of Florida     Cornell          
USA 
 
 
 
 
 
SUMMARY 
 
U.S. policy is to allow owners of distributed resources to effectively and reliably provide their services 
at scale, and operate harmoniously on an interconnected distribution and transmission grid.  
Accordingly, regulation, new business models and technology advances over the past decade have led 
to significant growth rates in distributed energy resources including generation, responsive demand, 
energy conservation and customer adoption of industrial, commercial and residential energy 
management systems.  The result is that several regions are reaching proposed capacity levels for 
distributed generation that exceed traditional operating and engineering practices for distribution 
systems. At the same time, policies advocating wholesale spot prices to customer devices (“prices to 
devices”) have not adequately considered distribution system reliability impacts or relationship to 
distributed generation.  As such, it is also not clear that current market models or regulations are 
entirely adequate or appropriate for the several emerging hybrid regional markets, such as California, 
with millions of distributed energy resources envision by the year 2020.  
 
As the market adoption of distributed energy resources (DER) reaches regional scale it will create 
significant issues in the management of the distribution system related to existing protection and 
control systems. This is likely to lead to issues for power quality and reliability because of three 
issues: (1) current wholesale pricing models for distributed resources do not reflect distribution level 
information related to location, reliability or power quality considerations; (2) pricing schemes 
involving real-time spot market prices, like Locational Marginal Pricing, are likely to create 
significant volatility for customer DER that is not desirable from either from operational or 
commercial perspective; and (3) integrating distributed resources into wholesale markets without 
aligning distribution control schemes may create unacceptable consequences. 
 
In this paper, we describe a framework for the development of a class of pricing mechanisms that both 
induce deep customer participation and enable efficient management of their end-use devices to 
provide both distribution and transmission side support.  The basic challenge resides in reliably 
extracting the desired response from customers on short time-scales. These new pricing mechanisms 
are needed to create effective closed loop systems that are tightly coupled with distribution control 
systems to ensure reliability and power quality.  
 
KEYWORDS 
 
Distributed Resources, Distribution, Controls, Markets, Pricing, Reliability, Stability, Power Quality 
                                                 
1 pdemar@caltech.edu  
 
 
21, rue d’Artois, F-75008 PARIS CIGRE US National Committee 
http : //www.cigre.org  2012 Grid of the Future Symposium         
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Introduction 
U.S. public policy has set clear objectives to enable broad market participation by customers’ 
distributed energy resources.  Over the past decade regulatory rules and market changes have 
increasingly reduced barriers to participation. Toward that end, a current policy objective is to provide 
economic signals to dynamically connect wholesale and retail markets, by enabling end-use consumer 
devices to respond to system conditions and thus provide both grid and consumer benefits.  However, 
consumers view reliability as a public good – they expect that whether they turn on their appliances 
will have no influence on the quality of power delivered to their neighbors, and no consumer is 
prevented from using an appliance at any time. As customer adoption of DER increases, it is becoming 
clearer that price responsive DER will have a material effect on distribution networks reliability/power 
quality. As such, distribution management will evolve from a passive to an active interaction with 
distributed resources. In this context, it becomes critical to consider the effects of the current pricing 
policies and control schemas.   
 
This paper describes the relationship between pricing schemes and grid control systems as it relates to 
distributed energy resources to ensure market structures, power systems and participation rules 
maintain a highly reliable system. Three basic issues should be addressed in this evolution: (1) the lack 
of effective grid services and related market based pricing schemes aligned with the temporal 
attributes of the use and response characteristics of customer devices/resources; (2) the lack of 
adequate pricing components that reflect distribution system operational considerations for the 
respective time periods; (3) new market structures based on hierarchical controls and appropriate 
feedback methods to ensure that the collection of independent agents will adapt, in real time, to 
changing conditions so as to ensure power quality and grid stability.   
 
 
Integration of Distributed Resources into Grid Operations 
Ideally, the ability to inform consumers and devices of market and grid conditions will allow the 
devices to proactively and independently become a beneficial part of grid management, while 
remaining under customer control.  In order to incentivize desired consumer response, it is essential 
that any pricing schema for customer device response include distribution system operational factors, 
not just wholesale markets or transmission considerations [1]. This is because, price signals can have 
an instantaneous effect on a number of independent agents, and thus the actions of one agent 
significantly influence the quality of power delivered to others.  The risk is that significant variability 
is being introduced that does not follow the traditional control system and operating paradigms. As 
such, the use of open loop real time prices (e.g., “prices to devices”) will create a problem. Instead, a 
closed loop system of price signals aligned with market and operational factors is needed and can be 
effective. 
 
If, for example, most buildings on a distribution circuit have an energy management system that turns 
off HVAC systems when electricity prices rise above a threshold, then the distribution circuit, and 
indeed the entire grid, can be destabilized. Several potential negative effects can occur under this 
scenario. First, the immediate drop of load may simultaneously create an unacceptable phase 
unbalance on the distribution circuit since many loads are connected to only one or two phases. 
Second, if a material amount of DG was interconnected at the time of load response, power flow on 
the distribution circuit may change direction and voltage would rise. This could cause protection 
scheme issues and unacceptable voltage levels. Third, in a worst case, this load curtailment could 
inadvertently trigger a high-frequency square wave destabilizing the grid. Fourth, when devices shut 
down in response to a high price, there is risk that reduced power consumption will result in low prices 
that will induce a resumption of consumption.  The ensuing oscillations are precisely what a control 
engineer would anticipate from such a “high gain feedback loop”.   
 
The current direction of market structure, controls, and pricing policies for distributed generation, 
demand response and other distributed energy resources is conflicted and questionable with respect to 
providing consistent, market based price signals for reliable distribution system operation and 
investment for customer DER and distribution infrastructure.  In California, for example, there are 
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both prices from the California Independent System Operator (CAISO) as well as utilities under their 
demand response programs available to qualifying customers that may be connected to the same 
distribution circuit and/or fed by the same distribution substation transformer. Figure 1 below 
illustrates a simplified view of the current market-control structure.  There are three basic control 
loops; bulk system, distribution system and customer/aggregator. Within and across this schema, there 
are multiple DER prices signals and inconsistent feedback paths on non-aligned time sequences that 
lead to non-scalable outcomes. 
 
 
Figure 1. Current Day-ahead/Intra-day Pricing-Control Schema 
 
DER Pricing and Grid Controls 
The current Federal policy regarding the use of dynamic wholesale spot pricing inherently creates a 
form of decentralized real-time control, where each customer or aggregator sets device response 
characteristics based on thier preferences. Unfortunately, these prices do not reflect distribution level 
information related to location, reliability or power quality considerations.  Also, the notion that 
consumers maintain direct control of their devices is a bit illusory, as devices are responding directly 
to variations in price based on a local control policy fixed a priori. The inherent closed-loop feedback 
between volatile spot price and aggregate demand could result in undesirable cycling of devices (and 
feedback into market prices) [2]. In this context it is important to understand the volatility associated 
with Locational Marginal Pricing (LMP) markets. Figure 2 below illustrates the current difficulties of 
price volatility due to resource variability at wholesale that will be compounded at retail, using a 
typical hour at the Midwest Independent System Operator (MISO).   
 
 
Figure 2: Locational Prices at Midwest ISO 
 
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Naturally, questions arise with respect to whether LMP is an appropriate market pricing mechanism 
for a hybrid electric system with tens of millions of distributed resource actors as envisioned by US 
policy. In theory, this sounds reasonable. In practice it becomes problematic. In the Pacific Northwest 
National Lab’s (PNNL) Olympic Peninsula project [3], building heating ventilation and air 
conditioning (HVAC) systems provided feedback of their state in the form of automated variable bids 
which in turn caused a simulated 5 minute clearing price to move so as to re-establish the balance 
between supply and demand, and moves in the clearing price cause changes in available responsive 
demand. The resulting price volatility-responsive device behavior illustrated in Figure 3 created 
unacceptable oscillations for customer comfort and electricity bills. At scale, it would create power 
quality and stability problems on distribution circuits. An analysis of the Olympic pilot [4] interpreted 
this behavior as the result of high gain proportional control – more appropriate feedback architecture 
(such as phase lag rather than proportional feedback) would naturally reject these oscillations.   
 
 
Figure 3. Volatility from Responsive Demand under Real-time Pricing 
A class of pricing mechanisms that both induces deep customer participation and enables efficient 
management of their end-use devices to provide both distribution and transmission grid support is 
needed.  The basic challenge resides in reliably extracting the desired response from customers on 
short time-scales – real-time control. Ideally, prices need to reflect the locational value of the resource, 
temporal attributes consistent with the distribution reliability considerations and capital investments.  
Such a distributed resource price schema would be based on two principles: 
a)  Convergence of wholesale price with concurrent distribution level engineering-economic 
values (positive or negative) to reconcile the relevant bulk system factors with the distribution 
level line loss, reliability, power quality and constraint factors on concurrent time periods.  
b)  Simple price signals (or possibly an alternative metric) that satisfy customer and aggregator 
requirements to (i) provide a means to monetize the value and (ii) enable innovation in 
customer products and services based derivative prices and commercial contracts.   
 
Distributed Markets & Controls 
Advocates of real-time wholesale market prices to customers and devices will argue that (b) above is 
achieved; however, this point of view has not considered the effect of a wholesale based optimization 
on the lower tier distribution system.  Traditionally, distribution was allowed to “float” based on 
tightly managing transmission system since power flowed in one direction.  In a future with perhaps 
30% of power being provided by distributed generation at customer sites, these models break down 
quickly.  It is becoming clearer that new distributed market mechanisms are needed.  The CAISO 
acknowledges that distribution level factors need to be considered in a recent paper on DER pricing 
[5]. However, the CAISO’s paper does not recognize the control loop issues present and actually 
suggests a pricing model, illustrated in Figure 4 that creates several control architecture problems: 
 
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• It prevents control federation, which makes resolving hidden coupling issues and preventing 
multi-objective clashes difficult. 
• It prevents disaggregation, which makes it difficult to take into account local tier conditions 
and grid state so as to maintain grid manageability at all levels. 
• Market clearing prices and customer economic decision models are likely misaligned with the 
timing required for maintaining distribution stability/power quality 
• Adding new feedback loops without a well-defined framework introduces new opportunities 
for feedback-based oscillations or runaways, such as with flash crashes and both price and 
power grid instability  
 
 
Figure 4. CAISO Demand Response Pricing Proposal 
 
What role should markets play to achieve the pricing goals?   
Markets generally provide a mechanism to (a) efficiently allocate resources and (b) enable innovation.  
The envisioned scale of distributed resources adds significant complexity and drives a level of 
convergence across the electric markets and physical operation. While this simplifies aspects of 
wholesale market operations, at scale this approach may result in undesirable outcomes in terms of 
power quality or system reliability. This is because some market designs cause the market function to 
act as a control element in a feedback control loop, whether intended or not. This loop is closed around 
a substantial portion of the power delivery system, including multiple tiers as illustrated in Figure 5 
below.  
 
 
Figure 5. Multi-Tier Market Structure 
 
To resolve the controls issues described, it is necessary to deconstruct the market into several tiers to 
create a hierarchical control scheme as represented in the simple model above.  Each tier needs to be 
able to simultaneously satisfy its control objectives as well as coordinate with the adjacent tier [1] [6].  
 
Of the three tiers, the middle tier – “local market and operations”, is the least developed. In particular, 
there are several aspects of local markets that would benefit from further research. Distribution 
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systems have become more dynamic with the potential for multi-directional power flows. To 
understand the operational dynamics, stochastic power flow models that can account for more than 
one feeder and ideally the related regional transmission system are required.  Engineering-economic 
based services specifications for DER to support distribution operations are needed along with pricing 
and contracting schemes for these services and associated market rules – e.g. [7]. Appropriate 
organized market structure to facilitate direct controls-based transactions and bi-lateral 3rd party 
transactions is also desirable. The relevance of local markets is that without such a market structure, it 
will be impossible to achieve the level of DER integration required under existing policy and concepts 
like microgrid cannot become reality. 
 
Conclusion 
Public policy belief is that wholesale market prices and bi-lateral transactions will resolve not only 
resource allocation, but also the reliability considerations for distributed resources. Specifically, this 
logic this belief suggests that “prices to devices” can ensure investment, reliability and power quality. 
This is conceptually appealing in its simplicity; however, in practice at scale it becomes challenging. It 
is not clear that any market has yet been able to construct an effective pricing scheme for distributed 
resources that can simultaneously address distributed energy resource economics with both physical 
distribution grid reliability considerations, and the control considerations required to maintain 
reliability in the face of dynamics and uncertainty.  
  
Stakeholders must consider this reality more fully in the design of markets and integration rules. 
Currently, the pattern has been to apply wholesale spot market principals developed for balancing 
large centralized and transmission connected resources to distributed resources. This approach is 
questionable given the scale and scope of distributed energy resources envisioned in public energy 
policy. As such, there are several areas to consider:  
• Effective market based prices reflecting distribution factors for distributed resources  
• Balancing markets at the distribution level as a means to ensure local reliability and power 
quality, and create prices for DER investment 
• Market pricing and participation rules can be devised to ensure a robust market place 
• Gaps and conflicts between related Federal and state regulatory rules 
Significant research, development and demonstration is necessary to address the issues in these areas 
highlighted by this paper. 
 
BIBLIOGRAPHY 
[1]   M. Chandy, S. Meyn, P. De Martini, et al, The Role of Markets in an Electric Grid with 
Distributed Energy Resources, Caltech Resnick Institute, May 2012 
[2] J. Taft and P. De Martini, Ultra-Large Scale Power System Control Architecture, August 2012  
[3]  PNNL, Pacific Northwest Gridwise Testbed Demonstration Projects Part 1: Olympic Peninsula 
Project report, DoE, October 2007 
[4]    S. Meyn, Markets for Differentiated Electric Power Products.  Tutorial lecture and panelist at the 
ACC 2012 pre-conference workshop on Smart Grid Markets: Integration of Renewables, Pricing, 
Modeling, and Optimization  [http://accworkshop12.mit.edu]  
[5] CAISO, White Paper Proposal Wholesale Grid State Indicator to Enable Price Responsive 
Demand, June 2012 
[6]   G. Wang, M. Negrete-Pincetic, A. Kowli, E. Shafieepoorfard, S. Meyn, and U. Shanbhag.     
Dynamic Competitive Equilibria in Electricity Markets. In A. Chakrabortty and M. Illic, editors, 
Control and Optimization Theory for Electric Smart Grids. Springer-Verlag, New York, NY, 
January, 2012. 
[7] E. Bitar, S. Low. Deadline-Differentiated Pricing of Deferrable Electric Power Service. 
Proceedings of the 51st IEEE conference on decision and control, Hawaii, 2012. 


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