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Linear prices for non-convex electricity markets: models and algorithms

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  • VAN VYVE, Mathieu

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    (Université catholique de Louvain, CORE and LSM, B-1348 Louvain-la-Neuve, Belgium)

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    Abstract

    Strict Linear Pricing in non-convex markets is a mathematical impossibility. In the context of electricity markets, two different classes of solutions have been proposed to this conundrum on both sides of the Atlantic. We formally describe these two approaches in a common framework, review and analyze their main properties, and discuss their shortcomings. In US, some orders are not settled at the market price, but at their bidding price, deviating from uniform pricing (all orders are financially settled at the same prices). This creates a disincentive to bid one's own true cost, and creates a missing money problem for the clearing house of the market. In Europe, all accepted orders are in-the-money are settled at the uniform market price. This implies that the welfare-maximizing solution is considered infeasible and also that the optimization problem is much less convex and more difficult to solve. This also creates fairness issues for orders of small volume, and the solution obtained does not implement a Walrasian equilibrium. Based on this analysis we propose a new model that draws on both approaches and retains their best theoretical properties. We also show how the different approaches compare on classical toy problem.

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    File URL: http://uclouvain.be/cps/ucl/doc/core/documents/coredp2011_50web.pdf
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    Bibliographic Info

    Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2011050.

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    Date of creation: 28 Oct 2011
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    Handle: RePEc:cor:louvco:2011050

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    Keywords: electricity markets; non-convexities; pricing;

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    1. Fleurbaey,Marc & Maniquet,François, 2011. "A Theory of Fairness and Social Welfare," Cambridge Books, Cambridge University Press, number 9780521887427, October.
    2. O'Neill, Richard P. & Sotkiewicz, Paul M. & Hobbs, Benjamin F. & Rothkopf, Michael H. & Stewart, William R., 2005. "Efficient market-clearing prices in markets with nonconvexities," European Journal of Operational Research, Elsevier, vol. 164(1), pages 269-285, July.
    3. Duranton, Gilles & Martin, Philippe & Mayer, Thierry & Mayneris, Florian, 2010. "The Economics of Clusters: Lessons from the French Experience," OUP Catalogue, Oxford University Press, number 9780199592203.
    4. Belleflamme,Paul & Peitz,Martin, 2010. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9780521681599, October.
    5. Herbert E. Scarf, 1994. "The Allocation of Resources in the Presence of Indivisibilities," Cowles Foundation Discussion Papers 1068, Cowles Foundation for Research in Economics, Yale University.
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