An optimization-based partial marginal pricing method to reduce excessive consumer payment in electricity markets

Among the pricing schemes, locational marginal pricing is the most widely adopted scheme in current electricity markets. Despite the nice properties, theoretical study and practical experience have shown that considering the strategic bidding behaviors of market participants, locational marginal pricing may result in excessive consumer payment and prejudices market efficiency. In this paper, we propose an optimization-based partial marginal pricing method to reduce consumer payment under strategic bidding. The advantages of the locational marginal pricing method are reserved to the best extent while the remaining problems are delicately handled. To achieve this, we first analyze the characteristics and problems of the locational marginal pricing scheme and present a partial marginal pricing structure. Second, we establish an optimization-based partial marginal pricing model, in which discriminatory price components are introduced in price formulation and the pricing properties including competitive equilibrium and revenue adequacy are formulated as constraints. Third, to verify the performance of the proposed pricing scheme considering the strategic bidding, a bi-level strategic bidding problem of the generator under the proposed pricing method is established and transformed into a mixed integer linear programming problem. The numerical results indicate that under the conventional pricing methods, the consumer payments under strategic bidding can be up to 16.67 times higher than those under truthful bidding, while the proposed method can effectively reduce excessive consumer payments by 92.1% while maintaining the desired pricing properties.