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A note on a revenue adequate pricing scheme that minimizes make-whole payments

Author

Listed:
  • Madani, Mehdi
  • Papavasiliou, Anthony

    (Université catholique de Louvain, LIDAM/CORE, Belgium)

Abstract

In this paper, we compare convex hull pricing to an alternative pricing scheme minimizing make-whole payments, in contrast to minimizing lost opportunity costs. We show how to compute prices that minimize make-whole payments using the so- called primal approach proposed for convex hull pricing. Building further on this analogy, a pricing framework is proposed. The framework is general enough to describe virtually all pricing rules proposed so far in the literature or used in industry, including current European market rules, and is meant to ease comparisons. Minimum make-whole payment pricing and convex hull pricing are compared in terms of deviation from a uniform pricing scheme, revenue adequacy for market operators, and computational hardness. Finally, we briefly recall why both pricing methods may encounter challenges in sending adequate price signals in case of congestion or scarcity of supply or demand.

Suggested Citation

  • Madani, Mehdi & Papavasiliou, Anthony, 2023. "A note on a revenue adequate pricing scheme that minimizes make-whole payments," LIDAM Reprints CORE 3268, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvrp:3268
    Note: In: 2022 18th International Conference on the European Energy Market (EEM). IEEE Xplore, 2022. ISBN 9781665408967
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