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Market Design Considerations for Scarcity Pricing: A Stochastic Equilibrium Framework

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  • Anthony Papavasiliou
  • Yves Smeers
  • Gauthier de Maere d’Aertrycke

Abstract

Scarcity pricing is a mechanism for improving the valuation of reserve capacity in real-time electricity markets. The goal of scarcity pricing is to mitigate the missing money problem and enhance investment in flexible resources. The implementation of scarcity pricing is underway in a number of U.S. markets, including Texas and PJM. The implementation is also currently under consideration in Belgium. As the mechanism was originally conceived in the context of a U.S.-style two-settlement system, its implementation in a European setting poses a number of interesting market design dilemmas which can affect the back-propagation of scarcity prices to forward day-ahead markets for energy and reserve capacity. We propose a modeling framework for analyzing these market design choices based on stochastic equilibrium, and use this modeling framework in order to represent and analyze a wide range of market design proposals. We report results on a case study of the Belgian electricity market.

Suggested Citation

  • Anthony Papavasiliou & Yves Smeers & Gauthier de Maere d’Aertrycke, 2021. "Market Design Considerations for Scarcity Pricing: A Stochastic Equilibrium Framework," The Energy Journal, , vol. 42(5), pages 195-220, September.
    • Handle: RePEc:sae:enejou:v:42:y:2021:i:5:p:195-220
    DOI: 10.5547/01956574.42.5.apap
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    References listed on IDEAS

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    1. Morales, Juan M. & Zugno, Marco & Pineda, Salvador & Pinson, Pierre, 2014. "Electricity market clearing with improved scheduling of stochastic production," European Journal of Operational Research, Elsevier, vol. 235(3), pages 765-774.
    2. Gauthier DE MAERE D’AERTRYCKE & Andreas EHRENMANN & Yves SMEERS, 2017. "Investment with incomplete markets for risk: the need for long-term contracts," LIDAM Reprints CORE 2849, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    3. Victor M. Zavala & Kibaek Kim & Mihai Anitescu & John Birge, 2017. "A Stochastic Electricity Market Clearing Formulation with Consistent Pricing Properties," Operations Research, INFORMS, vol. 65(3), pages 557-576, June.
    4. Ibrahim Abada & Gauthier de Maere d'Aertrycke & Yves Smeers, 2017. "On the multiplicity of solutions in generation capacity investment models with incomplete markets: a ris-averse stochastic equilibrium approach," LIDAM Reprints CORE 2909, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    5. Anthony Papavasiliou & Yves Smeers, 2017. "Remuneration of Flexibility using Operating Reserve Demand Curves: A Case Study of Belgium," The Energy Journal, International Association for Energy Economics, vol. 0(Number 6).
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    Cited by:

    1. Okhunjanov, Botir B. & McCluskey, Jill J. & Mittelhammer, Ron C., 2025. "Underpricing and perceived scarcity," Journal of Economic Behavior & Organization, Elsevier, vol. 229(C).
    2. Tao, Junyi & Li, Ran & Chen, Sijie & Qu, Hui & Xiang, Yue, 2024. "Reverse impact of capacity markets for a renewable-dominated power system," Applied Energy, Elsevier, vol. 375(C).

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