Demand Flexibility Strategies in Electricity Markets through CDM and VPP Integration

Abstract

The global push for carbon neutrality is accelerating the energy transition, driving fundamental changes in power systems. These include the emergence of Virtual Power Plants (VPPs), increasing integration of demand flexibility resources, and the growing importance of carbon pricing mechanisms. However, South Korea continues to face institutional and structural challenges in unlocking the full potential of demand response (DR) resources and in activating its underperforming carbon market. DR participation remains limited to the energy market, with virtually no integration alongside generation assets in aggregated systems such as VPPs. Moreover, the current baseline methodology lacks dynamic adjustment features, raising concerns about estimation accuracy and strategic manipulation. Korea’s carbon market also lags behind international benchmarks such as the EU-ETS and CBAM in terms of both liquidity and price signaling. To address these gaps, this study proposes a dual-track research framework. The first track introduces a DR-based Clean Development Mechanism (CDM) methodology for quantifying carbon reductions of DR resources. This approach introduces a Same-Day Adjustment (SDA) to enhance the accuracy of baseline estimation and incorporates a data-driven rebound effect model that captures load recovery behavior. The second track presents a market participation strategy for DR-integrated VPPs, supported by three sequential models: (i) an LSTM-based forecasting model, (ii) a MILP-based optimization model for market bidding, and (iii) a cooperative game-theoretic model to manage uncertainty. Case studies demonstrate that the proposed CDM methodology can yield meaningful carbon revenues—ranging from 33 to 53 KRW/kWh depending on the carbon price benchmark—thus enhancing the financial viability of DR participation. The integrated VPP strategy also proves effective in reducing risk and improving profitability, especially for small-scale operators. Overall, the study presents a strategic blueprint for aligning DR implementation with electricity and carbon market mechanisms, thereby promoting a more flexible and climate-oriented power system in Korea.