In this paper we address the issue of finding efficient partial equilibria in markets with non-convexities. This is a problem that has intrigued generation of economists. Beside its theoretical importance this issue is fundamental in energy markets which do not give the right price signals and incentives to maintain existing and invest in new generating capacity. By considering a competitive environment in which consumers maximize utility independently of other agents actions while suppliers are profit maximizers given other market agents actions, we are able to find efficient prices in markets with non-convexities. Based on this result we propose a design for an energy-only market able to give investors the correct price signals.
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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number
2008006.