IDEAS home Printed from https://ideas.repec.org/a/gam/jeners/v12y2019i6p1064-d215419.html
   My bibliography  Save this article

Spot Market Mechanism Design for the Electricity Market in China Considering the Impact of a Contract Market

Author

Listed:
  • Chen Zhang

    (State Key Laboratory of Power Transmission Equipment & System Security and New Technology, Chongqing University, Chongqing 400044, China)

  • Wei Yan

    (State Key Laboratory of Power Transmission Equipment & System Security and New Technology, Chongqing University, Chongqing 400044, China)

Abstract

To promote the reformation of the electricity market in China, a market mechanism that can support collaboration between the contract market and the upcoming spot market was designed in this paper. The focus of this paper was to develop a mechanism to institutionally stabilize the market by way of disciplining market power abuse through limiting arbitrage opportunities generated from multi-markets. To quantitatively describe the arbitrage opportunity, the arbitrage opportunity function (AOF) was defined. Based on inferences of the no-arbitrage principle and the AOF, a cost-based decomposition algorithm for contracts that could improve contract coverage was proposed. The incentive compatible settlement rule for the uncovered generation on the spot market was designed to properly manipulate the arbitrage opportunity. The decomposition algorithm and the settlement rule constituted the designed market mechanism. To verify the applicability and effectiveness of the proposed mechanism, the principles of incentive compatibility, individual rationality, and payment cost minimization were employed to test the designed market mechanism based on the concept of dominant policy equilibrium. This test was conducted on a fictitious case based on the IEEE-14 system. The analysis and results may provide valuable insights on market design in China based on the functional correlation between the contract market and the spot market.

Suggested Citation

  • Chen Zhang & Wei Yan, 2019. "Spot Market Mechanism Design for the Electricity Market in China Considering the Impact of a Contract Market," Energies, MDPI, vol. 12(6), pages 1-23, March.
    • Handle: RePEc:gam:jeners:v:12:y:2019:i:6:p:1064-:d:215419
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/1996-1073/12/6/1064/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/1996-1073/12/6/1064/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Khan, M. Ali & Sun, Yeneng, 2003. "Exact arbitrage, well-diversified portfolios and asset pricing in large markets," Journal of Economic Theory, Elsevier, vol. 110(2), pages 337-373, June.
    2. Silva, Carlos & Wollenberg, Bruce & Zheng, Charles Zhoucheng, 2001. "Application of Mechanism Design to Electric Power Markets," Staff General Research Papers Archive 12686, Iowa State University, Department of Economics.
    3. Anderson, Edward J. & Hu, Xinmin, 2008. "Forward contracts and market power in an electricity market," International Journal of Industrial Organization, Elsevier, vol. 26(3), pages 679-694, May.
    4. Shaun D. MCRAE & Frank A. WOLAK, 2009. "How Do Firms Exercise Unilateral Market Power? Evidence from a Bid-Based Wholesale Electricity Market," RSCAS Working Papers 2009/36, European University Institute.
    5. David P. Brown & Andrew Eckert, 2017. "Electricity market mergers with endogenous forward contracting," Journal of Regulatory Economics, Springer, vol. 51(3), pages 269-310, June.
    6. Green, Richard J & Newbery, David M, 1992. "Competition in the British Electricity Spot Market," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 929-953, October.
    7. Green, Richard, 1999. "The Electricity Contract Market in England and Wales," Journal of Industrial Economics, Wiley Blackwell, vol. 47(1), pages 107-124, March.
    8. Severin Borenstein, 2002. "The Trouble With Electricity Markets: Understanding California's Restructuring Disaster," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 191-211, Winter.
    9. Frank Wolak, 2000. "An Empirical Analysis of the Impact of Hedge Contracts on Bidding Behavior in a Competitive Electricity Market," International Economic Journal, Taylor & Francis Journals, vol. 14(2), pages 1-39.
    10. Richard Green, 1999. "The Electricity Contract Market in England and Wales," Journal of Industrial Economics, Wiley Blackwell, vol. 47(1), pages 107-124, March.
    11. Catherine D. Wolfram, 1999. "Measuring Duopoly Power in the British Electricity Spot Market," American Economic Review, American Economic Association, vol. 89(4), pages 805-826, September.
    12. Zou, Peng & Chen, Qixin & Xia, Qing & He, Chang & Kang, Chongqing, 2015. "Incentive compatible pool-based electricity market design and implementation: A Bayesian mechanism design approach," Applied Energy, Elsevier, vol. 158(C), pages 508-518.
    13. Ying Yu & Tongdan Jin & Chunjie Zhong, 2015. "Designing an Incentive Contract Menu for Sustaining the Electricity Market," Energies, MDPI, vol. 8(12), pages 1-22, December.
    14. Blaise Allaz & Jean-Luc Vila, 1993. "Cournot Competition, Forward Markets and Efficiency," Post-Print hal-00511806, HAL.
    15. Liu, Zhen & Zhang, Xiliang & Lieu, Jenny, 2010. "Design of the incentive mechanism in electricity auction market based on the signaling game theory," Energy, Elsevier, vol. 35(4), pages 1813-1819.
    16. Hobbs, Benjamin F. & Rothkopf, Michael H. & Hyde, Laurel C. & O'Neill, Richard P., 2000. "Evaluation of a Truthful Revelation Auction in the Context of Energy Markets with Nonconcave Benefits," Journal of Regulatory Economics, Springer, vol. 18(1), pages 5-32, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jun Liu & Jinchun Chen & Chao Wang & Zhang Chen & Xinglei Liu, 2020. "Market Trading Model of Urban Energy Internet Based on Tripartite Game Theory," Energies, MDPI, vol. 13(7), pages 1-24, April.
    2. Liu, Yang & Jiang, Zhigao & Guo, Bowei, 2022. "Assessing China’s provincial electricity spot market pilot operations: Lessons from Guangdong province," Energy Policy, Elsevier, vol. 164(C).
    3. Hugo Algarvio & António Couto & Fernando Lopes & Ana Estanqueiro, 2019. "Changing the Day-Ahead Gate Closure to Wind Power Integration: A Simulation-Based Study," Energies, MDPI, vol. 12(14), pages 1-20, July.
    4. Liu, Y. & Jiang, Z. & Guo, B., 2021. "Assessing China's Provincial Electricity Spot Market Pilot Operations: Lessons from the Guangdong Province," Cambridge Working Papers in Economics 2165, Faculty of Economics, University of Cambridge.
    5. Xuguang Yu & Gang Li & Chuntian Cheng & Yongjun Sun & Ran Chen, 2019. "Research and Application of Continuous Bidirectional Trading Mechanism in Yunnan Electricity Market," Energies, MDPI, vol. 12(24), pages 1-18, December.
    6. Yucekaya, A., 2022. "Electricity trading for coal-fired power plants in Turkish power market considering uncertainty in spot, derivatives and bilateral contract market," Renewable and Sustainable Energy Reviews, Elsevier, vol. 159(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Holmberg, Pär & Willems, Bert, 2015. "Relaxing competition through speculation: Committing to a negative supply slope," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 236-266.
    2. James B. Bushnell & Erin T. Mansur & Celeste Saravia, 2008. "Vertical Arrangements, Market Structure, and Competition: An Analysis of Restructured US Electricity Markets," American Economic Review, American Economic Association, vol. 98(1), pages 237-266, March.
    3. Guy Meunier, 2011. "Imperfect Competition and Long-term Contracts in Electricity Markets: Some Lessons from Theoretical Models," Chapters, in: Jean-Michel Glachant & Dominique Finon & Adrien de Hauteclocque (ed.), Competition, Contracts and Electricity Markets, chapter 6, Edward Elgar Publishing.
    4. Van Moer, Geert, 2019. "Electricity market competition when forward contracts are pairwise efficient," MPRA Paper 96660, University Library of Munich, Germany.
    5. Daron Acemoglu, Ali Kakhbod, and Asuman Ozdaglar, 2017. "Competition in Electricity Markets with Renewable Energy Sources," The Energy Journal, International Association for Energy Economics, vol. 0(KAPSARC S).
    6. Desmond Cai & Anish Agarwal & Adam Wierman, 2020. "On the Inefficiency of Forward Markets in Leader–Follower Competition," Operations Research, INFORMS, vol. 68(1), pages 35-52, January.
    7. David P. Brown & Andrew Eckert, 2018. "Analyzing the Impact of Electricity Market Structure Changes and Mergers: The Importance of Forward Commitments," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 52(1), pages 101-137, February.
    8. Crawford, Gregory S. & Crespo, Joseph & Tauchen, Helen, 2007. "Bidding asymmetries in multi-unit auctions: Implications of bid function equilibria in the British spot market for electricity," International Journal of Industrial Organization, Elsevier, vol. 25(6), pages 1233-1268, December.
    9. Carlos Suarez, 2021. "Private management and strategic bidding behavior in electricity markets: Evidence from Colombia," IREA Working Papers 202102, University of Barcelona, Research Institute of Applied Economics, revised Jan 2021.
    10. Fabra, Natalia & de Frutos, Maria-Angeles, 2008. "On the Impact of Forward Contract Obligations in Multi-Unit Auctions," CEPR Discussion Papers 6756, C.E.P.R. Discussion Papers.
    11. Dressler, Luisa, 2016. "Support schemes for renewable electricity in the European Union: Producer strategies and competition," Energy Economics, Elsevier, vol. 60(C), pages 186-196.
    12. David P. Brown & Andrew Eckert, 2017. "Electricity market mergers with endogenous forward contracting," Journal of Regulatory Economics, Springer, vol. 51(3), pages 269-310, June.
    13. Rubin, Ofir D. & Babcock, Bruce A., 2011. "A novel approach for modeling deregulated electricity markets," Energy Policy, Elsevier, vol. 39(5), pages 2711-2721, May.
    14. Aitor Ciarreta & María Espinosa, 2010. "Market power in the Spanish electricity auction," Journal of Regulatory Economics, Springer, vol. 37(1), pages 42-69, February.
    15. Bunn, Derek W. & Day, Christopher J., 2009. "Computational modelling of price formation in the electricity pool of England and Wales," Journal of Economic Dynamics and Control, Elsevier, vol. 33(2), pages 363-376, February.
    16. Carlos Suarez, 2021. "Mixed Oligopoly and Market Power Mitigation: Evidence from the Colombian Wholesale Electricity Market," IREA Working Papers 202101, University of Barcelona, Research Institute of Applied Economics, revised Jan 2021.
    17. Suarez, Carlos, 2022. "Private management and strategic bidding behavior in electricity markets: Evidence from Colombia," Energy Economics, Elsevier, vol. 111(C).
    18. Paizs, László & Mészáros, Mátyás Tamás, 2003. "Piachatalmi problémák modellezése a dereguláció utáni magyar áramtermelő piacon [Modelling problems of market power on the Hungarian electricity-generation market after deregulation]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(9), pages 735-764.
    19. van Eijkel, Remco & Kuper, Gerard H. & Moraga-González, José L., 2016. "Do firms sell forward for strategic reasons? An application to the wholesale market for natural gas," International Journal of Industrial Organization, Elsevier, vol. 49(C), pages 1-35.
    20. Holmberg, Pär & Newbery, David, 2010. "The supply function equilibrium and its policy implications for wholesale electricity auctions," Utilities Policy, Elsevier, vol. 18(4), pages 209-226, December.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jeners:v:12:y:2019:i:6:p:1064-:d:215419. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.