The electric power grid forms the foundation for several other critical infrastructures of national importance such as public health, transportation and telecommunication systems, to thrive. The current power grid runs on the century-old technology and faces serious challenges of the 21st century - Ever-increasing demand and the need to provide a sustainable way to meet the growing demand, increased requirement of resilience against man-made and natural disasters, ability to defend against cyber attacks, increasing demand for reliable power, requirement to integrate with alternate energy generation and storage technologies. Several countries, including the United States, have realized the immediate need to modernize the grid and to pursue the goal of a smart grid. Majority of recent grid modernization efforts are directed towards the distribution systems to be able to meet these new challenges. One of the key enablers of a fully functional Smart Grid are microgrids — subsystems of the grid, utilizing small generation capacities at the distribution system level to increase the overall reliability and power quality of the local grid. It is one of the key directions recommended by national electric delivery technologies roadmap in United States as well as policy makers for electricity delivery in many countries. Microgrids have witnessed serious research activity in the past few years, especially in areas such as multi-agent system (MAS) architectures for microgrid control and auction algorithms for microgrid electricity transaction. However, most of the prior research on electricity transaction in microgrids fails to recognize and represent the true nature of the microgrid electricity market. In this research, a comprehensive microgrid electricity market has been designed, taking into account several unique characteristics of this new market place. This thesis establishes an economic rationale to the vision of wide-scale deployment of microgrids serving residential communities in near future and develops a comprehensive understanding of microgrid electricity market. A novel concept of Community Microgrids is introduced and the market and business models for electricity transaction are proposed and validated based on economic forecasts of key drivers of distributed generation. The most important contribution of this research deals with establishing a need for a trustworthy model framework for microgrid market and introducing the concept of reputation score to market participants. A framework of day-ahead energy market (DAEM) for electricity transaction, incorporating an approach of using the reputation score to incentivize the sellers in the market to be trustworthy, has been designed and implemented in MATLAB with a graphical user interface (GUI). Current implementation demonstrates a market place with two sellers and nine buyers and is easily scalable to support multiple market participants. The proposed microgrid electricity market may spur the deployment of residential microgrids, incorporating distributed generation, thereby making significant contribution to increase the overall reliability and power quality of the local grid. / Master of Science