We introduce a novel contract design framework that enables demand side resources to participate in ancillary services markets in a cost efficient manner. Resources enter contracts with aggregators (which may be utilities) to provide capacity, which is directly controlled by the aggregator via a control signal. The contracting process allows consumers to make choices based upon their own cost/benefit analysis. Additionally, we assume the consumer agents cooperate, which potentially results in greater system benefit than with non-cooperative behavior. We design the contracts to be both incentive compatible and individually rational in the presence of imperfect information exchange between the consumers and the aggregator. Our model gives us insights into the effect of economic and engineering contract design parameters on the amount of reserve provision and the costs of demand response programs. We find more reserves are provided if agents can form separate coalitions for up and down reserves. Further, we find that short duration contracts (e.g., 1–4 hours) are preferable to day-ahead contracts. Additionally, we highlight the benefits of a day-ahead contract with several different pricing periods.
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