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A game theory approach with dynamic pricing to optimize smart grid

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Article in International Journal of Smart Grid and Clean Energy · July 2015
DOI: 10.12720/sgce.4.3.186-198

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 International Journal of Smart Grid and Clean Energy

A game theory approach with dynamic pricing to optimize

smart grid operation
Makhlouf Hadjia, Marc Girod-Genetb, Hossam Affifib *
a
Technological Research Institute - IRT SystemX,8 avenue de la vauve, 91120, Palaiseau, France
b
Institut Mines-Telecom, telecom SudParis, 17 rue charles fourier, 91010, Evry, France

Abstract
Smart Grids components include scalable metering, energy prediction (both production and consumption) and pricing.
One of their goals consists to attract consumers to use green energy, to promote periods of low consumption and to
dissuade customers from using their greedy devices during peak periods. The objective consists to determine the
optimal suggested prices by the energy operator and the optimal demands of consumers. In this paper, we propose a
theoretical model based on Stackelberg game to adjust prices of green energy. The proposed game is composed by a
leader represented by the operator, and multiple followers represented by consumers. A Nash/Stackelberg equilibrium
solution is found. Performance results confirm the uniqueness of Nash equilibrium and that a "best reply" dynamics
for the repeated game converges to this equilibrium.

Keywords: Smart grids, game theory, optimization, dynamic pricing

1. Introduction

To meet the future power demand and the aim to reduce 𝐶𝑂2 emissions designers of the next
generation of electric power, distribution grid initiate a large research and technological action under the
"Smart Grid" banner that starts to tackle some of the following issues:
 Significant reductions in residential peak demand energy consumption achieved by providing real-time
price and environmental signals in conjunction with advanced in-home technologies.
 Integration of the green energy production from both second tier operators and private clients to reduce
carbon footprint. This energy source is hence taking a major role in the future Smart Grid. Electric
vehicles are also considered as very important future elements as they can affect the consumption
peaks but they could also act as energy buffers to provide missing energy during these peaks [1].
 Provide an open infrastructure for newcomers to be easily integrated, in the same way as mobile
telecom market has been deregulated.
 Provision of real time measurement and control tools that provide scalable and preferment actions on
the energy grid.
The resulting architecture of a Smart Grid is defined as a standard power grid (traditional power
distribution network) that is coupled with both a telecommunication network and a distributed
information management system, and associated with services (handled within a energy-dedicated service
architecture) to allow the following:
 Better energy consumption management,
 Better management of energy production and delivery (production versus consumption rationalization),
 Efficient and dynamic mix of heterogeneous energy sources (including renewable ones),
 Power outage impacts reduction,

*Manuscript received May 8, 2015; revised August 12, 2015.

Corresponding author. Tel.: +0-33-016-908-0630; E-mail address: [email protected].
doi: 10.12720/sgce.4.3.186-198
 M. Hadji et al.: A game theory approach with dynamic pricing to optimize smart grid operation 187

 Dynamic pricing,
 Global energy efficiency increasing.
The telecommunication network is mainly used for metering/monitoring data collection and for the
data distribution related to the enforcement of Smart Grid and energy management/control policies. The
information management system is mainly carried out for the distributed storage and processing of data
used for the decision making related to the Smart Grid and energy control/management operations. This
Smart Grid architecture is therefore based on several and correlated key components (Real-time hybrid
smart metering, distributed management and control infrastructure, data mining, data aggregation and
data analysis infrastructure helping the actors to process and infer energy information and prediction and
pricing tools), as shown in Fig. 1.

Fig. 1. Smart grid global view (GridWise Alliance).

An important element of the smart grid chain concerns the pricing. We believe that dynamic pricing is
the only way to attract consumers to periods of low consumption and to dissuade them from using their
greedy devices in peak periods. It is clearly the objective of this paper.
The main objective of dynamic pricing, at least from the energy provider side, is the adjustment of
energy price according to market demand, e.g. increasing the price during peak periods. The expected
effect is the customer shifting of its consumption to off-peak periods (cascading power outage avoidance).
From the customer side, the main criteria that influences his consumption is the energy price (generally
higher during rush hours i.e. peaks), but other criteria could be considered such as, for example, energy
type (renewable or not) and customer profiles.
In our work, we consider the problem of constrained dynamic pricing in a Stackelberg/Nash manner
taking into account finite resources or energy (limited resources) constraints. We also consider
differentiated pricing proposals to better explore the revenue space and then select efficient strategies
leading to higher payoffs. This differentiation can also be justified by considering clients in different
geographic regions. Thus, we investigate game theoretical approaches to optimally determine the
dynamic pricing menu to be proposed by the energy operator to customers. In the same time, we seek
solutions to find optimal clients (often confused with customers) consumption demands according to the
proposed prices.
The central goal of this paper is to find an agreement between customers and the operator. This allows
different customers to partake in the interaction by proposing their respective demands and this in turn
enable the energy operator to better manage its resources (energy). This is a non-cooperative game, where
each customer is interested in maximizing her/his utility that can be modeled as a Stackelberg game [2],
where the operator set prices and clients update their consumption to maximize their payoffs.
The remainder of this paper is organized as follows: Section II discusses a state of the art of game
theory and the different components involved in a smart grid topology. Section III is dedicated to game
188 International Journal of Smart Grid and Clean Energy, vol. 4, no. 3, July 2015

theory approaches to handle with dynamic pricing problem. Section IV shows convergence steps to
determine a Nash Equilibrium Point (NEP) of a game. Section V is dedicated to solve the one leader
multiple followers’ game. The objective consists to determine the optimal pricing proposal under some
constraints. Conclusions and future work follow in Section VI.

2. Related Work and Motivation

Smart Grid key components has to be considered globally and the communication part should not be
dealt with independently. Network is clearly not the main objective in the smart grid forums and
standards, but it is a strong enabler. We should hence consider this as a use case with specific needs to
propose adequate solutions and protocols. In this paper, we focus on one potential problem related to
pricing. It cannot be achieved without the presence of a real-time and secure network infrastructure.
Intelligence, learning, processing, inference and self-adaptation have to be introduced in the power
managing units and the control systems in order to make them cognitive, in every power grid level,
processes and entities [3], [4]. This implies the support of decentralized and distributed control operations
of the Smart Grid, as well as the carrying out of distributed and autonomous multi-criteria decision
making. This also implies the design of a semantic open data model dedicated to the description and the
inference of energy information/system knowledge. Such a knowledge model should in particular enable:
the automation of control and monitoring systems, the better estimate of energy consumption levels, as
well as the interworking of energy systems [5].
Smart Grids decision making related to pricing mainly rely: on the history modeling and prevision of
both the energy production level and the energy consumption, as well as on the energy type (e.g.
renewable or not) and price. For the client side (the consumer), we developed a tool in the VELCRI
project [1] that learns his/her power consumption and that estimates the life of his batteries. It can predict
the time remaining and can decide if the recharging process can wait for the low price energy period. The
power provider is also learning the behavior of his clients on a minute/hour/day basis from one side and
making prediction on the green power generation according to weather forecast on the other. He
combines the two sets and produces power expectation per zone. This information is decisive to announce
the pricing for the energy in high and low consumption periods (see Fig. 2).

Fig. 2. Prediction scheme.

One can cite the U.S as an example of important pioneer country for the deployment of Smart Grids
technologies and various forms of dynamic pricing already been considered over there [6]—[8];
 Time of Use (ToU), standard two part and pre-establish rate comprising on-peak and off-peak periods,
 Critical Peak Pricing (CPP), similar to ToU with a more expensive pricing strategy during peak and
day hours. Generally, the estimate of next day load (peaks) trigger the switching of pricing strategies
to CPP,
 Critical Peak Rebates (CPR), comprises same critical pricing periods as CPP but provides customer
with price rebates proportional to their consumption reduction during peaks,
 Real Time Pricing (RTP or Hourly Pricing - HP), offers prices reflecting the wholesale energy cost and
varying according to an hourly basis,
 M. Hadji et al.: A game theory approach with dynamic pricing to optimize smart grid operation 189

 Fixed Rate Pricing (FRP).

All these pricing strategies provide options for consumers to influence their electricity bill and have
therefore to be considered in this paper.
In [8], the authors have developed 4 time-based pricing strategies (ToU, CPP, Peak Time Rebate or
PTR and RTP). They have applied those pricing strategies to three consumer classes (Residential, Small
and Medium General Service), their goal being to simulate the consumer responses for modeling the
impact of their pricing strategies. In [7]—[9], authors show that, among all those pricing strategies, CPP
was the most efficient in terms of peak reduction (up to 20% of energy usage reduction), while RTP
enable a significant reduction of customer annual electricity bill (an average of 12% reduction).
Few studies have already been conducted for applying game theory to energy demand management
and dynamic pricing. In [10], the authors have proposed a distributed strategy for energy demand
management among multiple collaborating consumers and so they are not addressing the pricing
problematic. In [11] and [12], the authors propose a multi-consumer dynamic pricing game using two
strategies: opportunistic electricity or traditional one. In [11], the authors are only considering the
scenario where one power source or generator (not the energy provider itself) is shared among multiple
consumers. They only implement a simple pricing strategy based on client cooperation and message
exchange. In [12], the authors try to incorporate multiple providers (2 types, renewable or not) into their
game formulation. However, they both (i.e. [11], [12]) use a less dynamic consumer behavior than the one
we are using and they both are not implementing the same utility functions as us.
In this paper, we propose a novel algorithm based on game theory principles to adjust the price and the
demand using a game. The actors of this game are the energy provider (or for simplicity the operator) and
the consumers. We consider a situation where each player can change its strategy one after the other and
adopts a "best reply" response. It is shown that this dynamic converges to the Nash equilibrium [13] of
the strategic game. Assuming the operator knows the consumer's utility function, this equilibrium point
may give him some information to adjust its price leading to a desired level of consumption.
The game theory has been applied to model several information systems and communication problems.
It can bring an innovative solution to systems with different independent players, where the action of each
player has an incidence on the overall utility of the system [14]-[16] and [17].
In our context and after the abstraction of the network part, players correspond to energy providers and
consumers. We may go beyond this first simple classification by introducing more players in the network
side (infrastructure operator, mobile operator, facility operator, clearing house, etc…) but we restrict our
analysis in this paper to a simple model. Note that in the simple model presented here, we may consider
that the consumer represents in fact a set of several clients, all having the same utility function (and taking
their action simultaneously).
Note also that the case where end client is buying and selling back energy when she generates green
power, it is assimilated to the simple provider and client game.
The strategy chosen by players may be in general concurrent or cooperative. It is concurrent when the
players compete on the resource and it becomes cooperative when players work together to improve the
utility outcome.
In the Smart Grid context, we can find both cases. For example, identical energy operators may be
concurrent to attract a client and they may be cooperative to overcome a peak energy consumption period.

3. Dynamic Pricing Game Theory Approach

We describe hereafter the solution we propose to optimize the system and to find an equilibrium point.
We consider in the smart grid case in general and in this study in particular that the strategy of players is
restricted to the production and the consumption of energy for both types of players (energy operators and
end clients).
The best strategy for players in the smart grid context can be seen from two different perspectives.
The first best strategy could be a solution that minimizes the overall non green energy consumption.
This could correspond to a patriotic action in favor of the planet, etc.
190 International Journal of Smart Grid and Clean Energy, vol. 4, no. 3, July 2015

The second strategy would be to maximize gains of energy operators and minimize expenditures of
end clients.
In the first case, the pure strategies would correspond to the energy production and to the energy
consumption actions.
We know from field trials that green energy can be easily lost because not consumed [18]. So we need
to match the production with the expected consumption. While in conventional energy production phase
adjustments can be made according to the environmental parameters such as time of day, of year, weather,
etc.
Our algorithm is combining both approaches. We try to find the dynamic pricing strategy that
improves green energy consumption and that is pricewise interesting for end customers.
The game tree can be sketched in Fig. 3 to understand the trends.

Fig. 3. The different cases in a smart grid simple context.

Fig. 3 shows essentially green energy production as a sequential game between energy operator with a
vector of strategies given by (producing; non-producing), and customers with a strategy vector given by
(consuming; idle). When the operator strategy consists to produce energy, the clients may consume it or
not. In case of clients play "idle" strategy, then the energy produced is lost and this is a budget deficit for
the operator, but in the same time, it is also considered as an amount of money not saved by clients if they
consume later non green and more expensive energy. We derive the following normal form of the
corresponding strategic game (i.e. when the players take actions simultaneously). For the sake of
simplicity, we will use "+" (respectively "-") to indicate positive (respectively. negative) utility function
(payoff), and by 0 to indicate idle situation.
Table 1. Outcome of the green energy production game
Provider/Client Consumes Idle
Produces [+; +] [-; 0]
Idle [0; -] [0; 0]

According to Table 1, one can observe the following:

 When energy is produced and consumed we have the first situation and both players can win,
 When energy is not produced but the consumer needs power, we consider that the client suffers a loss,
 When energy is produced but not consumed we consider that the provider loses money,
 When both players are idle
By applying the definition of a Nash Equilibrium (see [13] for more details) on Table 1, we can deduce
that this game admits a unique Nash equilibrium: it corresponds to the outcome ([+; +]).
For this kind of game, we can propose several strategies. We have restricted the study and the solution
to the following strategies:
For the producer, the strategy is to find the best price,
 M. Hadji et al.: A game theory approach with dynamic pricing to optimize smart grid operation 191

For the client, the strategy is to find the best amount of energy consumption according to the proposed
price,
We can also adopt a reasoning similar to [1] with the global satisfaction of achieving an action in favor
to humanity (subjective measures that are arbitrary) but we prefer to find an objective with simple
measures to attract both players.
The utility function that we propose gives satisfaction to a consumer when he believes that green
energy has reduced the energy cost. This is translated to a saving cost for this consumer.
We assume that the price dynamic. The same reasoning is applied to the energy operator as it saves
expensive energy and hence reduces its cost.
We define 𝐶𝑐 (𝑥, 𝑦) and 𝐶𝑜𝑝𝑒𝑟 (𝑥, 𝑦) to be the utility and revenue functions for consumer and operator
respectively, where 𝑥 denotes the amount energy consumption chosen by the client and𝑦 , the price set by
the operator.
The consumer will consume energy from the operator up to a certain limit that corresponds to his
requirements as shown in Fig. 4.

Fig. 4. Consumption pattern of the consumer

We now propose a mathematical formulation of the utility function for a consumer as a function of his
consumption, assuming a fixed price by the operator, as follows:

𝐶𝑐 (𝑥, 𝑦) = 𝐴𝑙𝑛(𝑥) − 𝑦𝑥 (1)

where A is a positive constant (A > 0), 𝑥 is the consumption variable and 𝑦 is the price published by the
operator.
Note that the normal consumption as shown in Figure 4 corresponds to a logarithmic progression but it
is negatively affected if the price is increased. This kind of curves can be observed when charging an
electric vehicle or with a normal domestic behavior.
We assume a typical revenue function of the operator given as follows:

𝐶𝑜𝑝𝑒𝑟 (𝑥, 𝑦) = 𝑦𝑥 − 𝛼𝑦 2 (2)

In the second term of (2), parameter α (α >0) is used to regulate power when the price is very low,
dissuading hence greedy consumption from a single client.
To deduce the optimal pricing strategy of the energy operator, and then finding the best consumption
demand of a customer, we derive the following operations:

 Coper
 x  2 y  0  x  2ay (3)
y

In the following, we find the optimum response function for the consumer utility (see Fig. 5) by
deriving with respect to cost. We first use (1) to replace the value of 𝑥 find in (3) in the client utility
function (1). We obtain:
192 International Journal of Smart Grid and Clean Energy, vol. 4, no. 3, July 2015

𝐶𝑐 (𝑥, 𝑦) = 𝐴𝑙𝑛(2𝛼𝑦) − 2𝛼𝑦²

Fig. 5. Best response function for the consumer.

We seek for the maximum value of 𝐶𝑐 (𝑥, 𝑦) as follows:

 Cc A b  b2  4ac
  4 y  0  4 y 2  A
y y 2a

1 𝐴
Which leads to deduce 𝑦= √ .
2 𝛼

𝐴
Now we replace this value in (3) and we get easily = 𝛼√ .
𝛼
Then the couple of strategies at the Nash equilibrium is given by:

 A 1 A
( x* ; y* )    ;  (4)
  2  

To prove the uniqueness of the Nash Equilibrium Point(𝑥 ∗ ; 𝑦 ∗ ), we verify the following:

𝜕2 𝐶𝑐 𝐴
=− − 4𝛼 < 0 as 𝛼 > 0 and 𝐴 > 0
𝜕𝑦 2 𝑦2

Moreover, we also verify:

𝜕2 𝐶𝑜𝑝𝑒𝑟
= −2𝛼 < 0 as 𝛼 > 0
𝜕𝑦 2

Fig. 6. Finding the nash equilibrium.

 M. Hadji et al.: A game theory approach with dynamic pricing to optimize smart grid operation 193

This leads to conclude the uniqueness of the NEP found in (4). Fig. 6 shows clearly this result and the
uniqueness of the NEP.

4. Convergence to a Nash Equilibrium Point

In this particular problem and with our assumptions, the two defined curves (operator and consumer
payoffs) will intersect in a single point: the Nash equilibrium of the strategic game. Moreover, our
simulations with MATLAB [19] illustrate that the strategies adopted by the two players (best reply
dynamics) leads to the same result, and hence the system converges to this point after a certain number of
iterations (see Fig. 7).

Fig. 7. Algorithm steps convergence towards equilibrium.

4.1. Game assumptions

By assuming that both players know all the characteristics of the game (both utility functions), and all
players actions are known at each step of the strategic interaction, we precise the nature of a complete
information game. As it is shown in Fig. 7, the algorithm in the operator side starts by assigning a price to
the green power. The price here is high hence the client adopts certain consumption. Afterwards, the
operator reacts to this and decreases price leading to increasing client consumption. This procedure is
continued and converges to the equilibrium point.

4.2. Analysis and potential extensions

The resulting MATLAB application is based on the equations derived before but is enriched with
many watchdogs that prevent for example from proposing too high or too low prices. We also need to
adjust parameters to the kind and category of power meters. Details such as the nominal power, the
presence of day/night tariffs, etc., are taken into account.
We note that the presented solution is suitable only for the first case in Table 1. We can extrapolate the
system to propose a solution especially to encourage the client to consume green energy if he did not yet
start any activity.
To enhance the quality of our approach, the equations (1) and (2) can be improved with several details
to sketch better the kind of client or operator we are dealing with. Finally, one can adapt dynamic games
where one of the players or both change his strategy during the game. The result should be different and
depends on the new Nash equilibrium with under time constraints.

5. Capturing the Cumulative Domestic Consumption

This section describes a more realistic scenario that includes hundreds, or thousands of clients
(consumers). In real life, consumers do not start or synchronize their energy consumption. Moreover,
consumption peaks happen during known periods such as between 19 PM and 20 PM in Western Europe.
194 International Journal of Smart Grid and Clean Energy, vol. 4, no. 3, July 2015

This scenario can be modeled as shown in Fig. 8, in which we distinguish two levels: the operator and
consumers levels.

Fig. 8. One leader and multiple followers’ game.

We note two cases for the pricing policy: uniform prices (all the considered customers have the same
price), and differentiated prices (energy operator proposes different prices to consumers according to
some criteria). In case of differentiated prices (respectively. uniform prices), we note by
𝑜𝑝𝑒𝑟
𝑦𝑖 (respectively.𝑦 𝑜𝑝𝑒𝑟 ) the proposed price by the operator "𝑜𝑝𝑒𝑟" to consumer "𝑖".

5.1 Uniform prices cases

𝑜𝑝𝑒𝑟
In this case, we suppose that the operator suggests uniform prices to customers, so that 𝑦𝑖 = 𝑦 𝑜𝑝𝑒𝑟 .
Furthermore, normally, we would also add the time dimension in such a summation as customers start
their electric devices in a desynchronized manner. However, as the consumption function is taking the
dynamicity of cost as a variable, this can implicitly replace the effect of time and can hence represent the
same effect of de-correlation between clients.
The game is now equivalent to the scenario where a consumer has the following objective function:

𝐶𝑖 (𝑥, 𝑦) = 𝐴𝑖 ln(𝑥𝑖 ) − 𝑦 𝑜𝑝𝑒𝑟 𝑥𝑖 (5)

To maximize the function (5), we give its derivative according to 𝑥𝑖 , and let it equal to zero:
𝜕𝐶𝑖 (𝑥,𝑦) 𝐴𝑖
= − 𝑦 𝑜𝑝𝑒𝑟 = 0 (6)
𝜕𝑥𝑖 𝑥𝑖

Solving equation (\ref{derive10}) leads to obtain the following relation:

𝐴𝑖
𝑥𝑖 = (7)
𝑦 𝑜𝑝𝑒𝑟

In the other hand, the objective function of the operator is defined as follows:

𝐶𝑜𝑝𝑒𝑟 (𝑥, 𝑦) = ∑𝑁
𝑖=1 𝑦
𝑜𝑝𝑒𝑟
𝑥𝑖 − 𝛼𝑖 (𝑦 𝑜𝑝𝑒𝑟 )² (8)

Subject to limited resource constraints noted by “AR” for Available Resources within the operator:

∑𝑁
𝑖=1 𝑥𝑖 ≤ 𝐴𝑅 (9)

To maximize the function (8) over the vector of demands 𝑥 and subject to the constraints given by (9),
we use the Lagrangian method:
𝑁 𝑁
𝐿(𝑦, 𝜆) = ∑ 𝑦 𝑜𝑝𝑒𝑟 𝑥𝑖 − 𝛼𝑖 (𝑦 𝑜𝑝𝑒𝑟 )2 − 𝜆 [∑ 𝑥𝑖 − 𝐴𝑅 ]
𝑖=1 𝑖=1
 M. Hadji et al.: A game theory approach with dynamic pricing to optimize smart grid operation 195

λ is the Lagrangian multiplier. Let us now calculate the derivative of 𝐿 with respect to 𝑦 𝑜𝑝𝑒𝑟 , and let it
equal to zero:
𝜕𝐿(𝑦,𝜆)
= ∑𝑁
𝑖=1 𝑥𝑖 − 2𝛼𝑖 𝑦
𝑜𝑝𝑒𝑟
=0 (10)
𝜕𝑦 𝑜𝑝𝑒𝑟

In the same manner, we also calculate the derivative of 𝐿 with respect to λ:

𝜕𝐿(𝑦,𝜆)
= ∑𝑁
𝑖=1 𝑥𝑖 − 𝐴𝑅 = 0 (11)
𝜕𝜆

From (10), we deduce:

𝑁 𝑁 𝑁

∑ 𝑥𝑖 = ∑ 2𝛼𝑖 𝑦 𝑜𝑝𝑒𝑟 = 2𝑦 𝑜𝑝𝑒𝑟 ∑ 𝛼𝑖 = 2𝑦 𝑜𝑝𝑒𝑟 𝑁𝛼̅

𝑖=1 𝑖=1 𝑖=1

1
where 𝛼̅ = ∑𝑁 𝛼.
𝑁 𝑖=1 𝑖
By using (11), we deduce:

2𝑁𝛼̅𝑦 𝑜𝑝𝑒𝑟 = 𝐴𝑅

Which leads to:

𝐴𝑅
(𝑦 𝑜𝑝𝑒𝑟 )∗ =
2𝑁𝛼̅
From (7), we also get the optimal consumption of a client i:

𝐴𝑖
𝑥𝑖∗ = 2𝑁𝛼̅
𝐴𝑅
We deduce the Nash equilibrium point in case of uniform prices given by:

𝐴𝑖 𝐴𝑅
(𝑥𝑖∗ ; (𝑦 𝑜𝑝𝑒𝑟 )∗ ) = (2𝑁𝛼̅ ; )
𝐴𝑅 2𝑁𝛼̅

5.2 Differentiated prices case

We consider different possible prices proposed by the operator to different consumers. We assume that
the prices are different from a geographic location to another, and the operator wants to favorite certain
categories for different reasons. The net utility function of a consumer i is then given as follows:
𝑜𝑝𝑒𝑟
𝐶𝑖 (𝑥𝑖 , 𝑦) = 𝐴𝑖 ln(𝑥𝑖 ) − 𝑦𝑖 𝑥𝑖 (12)

In the same manner, we give the revenue of the operator when dealing with 𝑁customers:
𝑜𝑝𝑒𝑟 𝑜𝑝𝑒𝑟
𝐶𝑜𝑝𝑒𝑟 (𝑥, 𝑦) = ∑𝑁
𝑖=1(𝑦𝑖 𝑥𝑖 − 𝛼𝑖 (𝑦𝑖 )²) (13)

Subject to resource available constraints:

∑𝑁
𝑖=1 𝑥𝑖 ≤ 𝐴𝑅 (14)

We first maximize (12) to obtain the first relation between customer's consumption and the pricing
suggested by the operator:
196 International Journal of Smart Grid and Clean Energy, vol. 4, no. 3, July 2015

𝜕𝐶𝑖 (𝑥, 𝑦) 𝐴𝑖 𝑜𝑝𝑒𝑟

= − 𝑦𝑖 =0
𝜕𝑥𝑖 𝑥𝑖

This leads to obtain:

𝐴𝑖 𝑜𝑝𝑒𝑟
𝑥𝑖 = 𝑜𝑝𝑒𝑟 , 𝑦𝑖 >0 (15)
𝑦𝑖

To maximize the function (13) over the vector of prices 𝑦 𝑜𝑝𝑒𝑟 and subject to the constraint given by
(14), we use the Lagrangian method.
𝑁 𝑁
𝑜𝑝𝑒𝑟
𝐿(𝑦, 𝜆) = ∑ (𝑦𝑖 𝑥𝑖 − 𝛼𝑖 (𝑦 𝑜𝑝𝑒𝑟 )2 ) − 𝜆 [∑ 𝑥𝑖 − 𝐴𝑅 ]
𝑖=1 𝑖=1

𝑜𝑝𝑒𝑟
λ is the Lagrangian multiplier. Let us now calculate the derivative form of 𝐿 with respect to 𝑦𝑖 , and
let it equal to zero:
𝜕𝐿(𝑦,𝜆)
𝑜𝑝𝑒𝑟 =0 (16)
𝜕𝑦𝑖

In the same manner, we also calculate the derivative form of 𝐿 with respect to λ:
𝜕𝐿(𝑦,𝜆)
=0 (17)
𝜕𝜆

Solving the equation system composed by (16) and (17) leads to get:
𝑁 𝑁
∑ 𝑥𝑖 = ∑ 2𝛼𝑖 𝑦 𝑜𝑝𝑒𝑟 = 𝐴𝑅
𝑖=1 𝑖=1

In which we deduce:

∑𝑁
𝑖=1 𝛼𝑖 𝑦
𝑜𝑝𝑒𝑟
= 𝐴𝑅/2 (18)

We now extract the 𝑖 𝑡ℎ term from (18), and we get:

𝑜𝑝𝑒𝑟 𝑜𝑝𝑒𝑟 𝐴𝑅
𝛼𝑖 𝑦𝑖 + ∑𝑁
𝑢=1,𝑢≠𝑖 𝛼𝑢 𝑦𝑢 = (19)
2

By summing (19) over all customers𝑖 = 1, … , 𝑁, we obtain:

𝑁 𝑁 𝑁
𝑁
𝑜𝑝𝑒𝑟 𝐴𝑅 𝐴𝑅
∑ 𝛼𝑖 𝑦 𝑜𝑝𝑒𝑟 + ∑ ∑ 𝛼𝑢 𝑦𝑢 =∑ = 𝑁
𝑖=1 2 2
𝑖=1 𝑢=1,𝑢≠𝑖 𝑖=1

Which is equivalent to write:

𝐴𝑅 𝑁
𝑜𝑝𝑒𝑟 𝐴𝑅
+ 𝑁 (∑ 𝛼𝑢 𝑦𝑢 ) = 𝑁
2 𝑢=1,𝑢≠𝑖 2

this is also equivalent to:

𝑁
𝑜𝑝𝑒𝑟 𝐴𝑅
𝑁 (∑ 𝛼𝑢 𝑦𝑢 )= (𝑁 − 1)
𝑢=1,𝑢≠𝑖 2

this leads to deduce:

𝑁
𝑜𝑝𝑒𝑟 𝑁 − 1 𝐴𝑅 1 𝐴𝑅
(∑ 𝛼𝑢 𝑦𝑢 )= = (1 − )
𝑢=1,𝑢≠𝑖 𝑁 2 𝑁 2
 M. Hadji et al.: A game theory approach with dynamic pricing to optimize smart grid operation 197

then, (19) can be rewritten as follows:

𝑜𝑝𝑒𝑟 1 𝐴𝑅 𝐴𝑅
𝛼𝑖 𝑦𝑖 + (1 − ) =
𝑁 2 2

it is not difficult to conclude that:

𝑜𝑝𝑒𝑟 𝐴𝑅
𝛼𝑖 𝑦𝑖 =
2𝑁

Thus, we can see that we reach similar result for the optimal consumer price:

𝑜𝑝𝑒𝑟 ∗ 𝐴𝑅
(𝑦𝑖 ) =
2𝑁𝛼𝑖

and for an optimal consumption or energy demand of a consumer i:

2𝐴𝑖 𝛼𝑖 𝑁
(𝑥𝑖 )∗ =
𝐴𝑅

The Nash Equilibrium Point in case of dynamic price and multiple clients is given by the couple:

𝑜𝑝𝑒𝑟 ∗ 2𝐴𝑖 𝛼𝑖 𝑁 𝐴𝑅
((𝑥𝑖 )∗ ; (𝑦𝑖 ) )=( ; )
𝐴𝑅 2𝑁𝛼𝑖

6. Summary and Future Work

The Smart Grid context introduces a large number of interesting problems and optimizations to solve.
Assuming the presence of a network infrastructure, precise real-time metering devices and prediction
systems we have presented a game theory approach to encourage end customers to consume green energy
as it is produced. The algorithm is based on the presence of two players: the operator and the customer
and introduces a dynamic pricing strategy. The objective of the players is to reduce the energy cost and to
have some fairness in green energy distribution. We show that such a system can have a Nash equilibrium
point. A simple algorithm is described to reach this point.
We want to extend this work to more complex games with more actors, e.g. multiple providers
scenarios where the consumer is also playing the operator role (e.g. it sails his too much produced
renewable energy to his neighbors). We also plan to integrate this work into the prediction tools and
distributed metering simulators we have already developed. These extension works will in particular be
conducted in the context of SEAS ITEA3 project [5].

Acknowledgements

This research work has been carried out in the framework of the project Smart City Energy Analytics
at Technological Research Institute SystemX, and therefore granted with public funds within the scope of
the French Program "Investissements d'Avenir".

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