Market Mechanisms for TSO-DSO-Consumers Flexibility Coordination

Demand-side flexible resources are crucial for transmission system operators (TSOs) and distribution system operators (DSOs) to manage the intermittency and uncertainty of distributed renewable energy. This paper examines the strategic interactions among TSOs, DSOs, and consumers in flexibility procurement using a top-down tri-level optimization framework. At the upper level, the TSO minimizes system imbalance costs by procuring its own flexible resources and incentivizing DSOs to provide flexibility. At the middle level, DSOs maximize their profits by procuring flexibility from both local resources and consumers, based on the flexibility prices set by the TSO. At the lower level, consumers make demand response decisions to maximize their utility given the prices set by their DSOs. To address the computational challenges of solving this tri-level problem, we propose a modified Column-and-Cut Generation (C&CG) algorithm for efficient optimization. We conduct a comparative analysis of stakeholder payoffs under three coordination market mechanisms: the proposed top-down approach, a centralized benchmark, and a bottom-up benchmark. Our results reveal a first-mover advantage in sequential games and demonstrate that the top-down mechanism achieves nearly the same flexibility procurement cost as the centralized benchmark while reducing TSO and DSO flexibility payments compared to the bottom-up approach. Finally, numerical studies confirm that consumer participation benefits all market participants, including TSOs, DSOs, and consumers.