Design and Analysis of Incentive Mechanisms for Prosumers under the lens of Prospect Theory

Users can now give back energies to the grid using distributed resources. Proper incentive mechanisms are required for such users, also known as prosumers, in order to maximize the sell-back amount while maintaining the retailer's profit. However, all the existing literature considers expected utility theory (EUT) where they assume that prosumers maximize their expected payoff in the face of uncertainty. We consider prospect theory (PT) which models the true behavior of humans under uncertainty. We show that in a day-ahead contract pricing mechanism, the actual optimal value of contract and the sell-back amount may be smaller compared to the one computed by EUT. We also propose a lottery-based mechanism and show that such a mechanism can increase the sell-back amount while increasing the retailer's savings compared to day-ahead contract pricing.