Rethinking the Price Formation Problem–Part 1: Participant Incentives under Uncertainty
- Pacific Northwest National Laboratory (PNNL), Richland, WA (United States)
- National Renewable Energy Laboratory (NREL), Golden, CO (United States)
- Cornell Univ., Ithaca, NY (United States)
Operators of organized wholesale electricity markets attempt to form prices in such a way that the private incentives of market participants are consistent with a socially optimal commitment and dispatch schedule. In the U.S. context, several competing price formation schemes have been proposed to address the non-convex production cost functions characteristic of most generation technologies. Here, this paper considers how the design and analysis of price formation policies for non-convex markets are affected by the uncertainty inherent in electricity demand and supply. We argue that by excluding uncertainty, the analytical framework underlying existing policies mischaracterizes the incentives of market participants, leading to inefficient price formation and poor incentives for flexibility. We establish favorable theoretical properties of a new construct, ex ante convex hull pricing , and demonstrate the difference between this idealized benchmark and existing methods on a large-scale test system. Given increased operational uncertainty with a transition to wind and solar generation, distortions caused by poor incentives for flexibility are likely to grow without improved price formation in organized wholesale markets.
- Research Organization:
- National Renewable Energy Laboratory (NREL), Golden, CO (United States)
- Sponsoring Organization:
- USDOE Advanced Research Projects Agency - Energy (ARPA-E)
- Grant/Contract Number:
- AC36-08GO28308
- OSTI ID:
- 2005541
- Report Number(s):
- NREL/JA-2C00-84454; MainId:85227; UUID:895d4246-d968-46fb-9c11-ac952e9eb69f; MainAdminID:70646
- Journal Information:
- IEEE Transactions on Energy Markets, Policy and Regulation, Vol. 1, Issue 4; ISSN 2771-9626
- Publisher:
- IEEECopyright Statement
- Country of Publication:
- United States
- Language:
- English
Similar Records
Coordination of Retail Demand Response with Midwest ISO Markets
A Computationally Efficient Algorithm for Computing Convex Hull Prices