Achieving equilibrium and local incentive compatibility for electricity markets by using redundant constraints

Abstract

In the current US day-ahead electricity markets, auction is complicated because of the existence of both discrete variables and continuous variables, which implies that there may be no linear prices to support equilibrium. To meet the system demand, the Independent System Operator (ISO) uses lump sum “uplift payments” to make generators follow its schedule. However, these uplift payments are opaque and difficult to hedge in terms of price signals. In addition, there are incentives for suppliers to bid other than their true costs. Untruthful bidding is undesirable, since in this case minimizing the total bid cost does not imply minimizing the total production cost, or maximizing the social welfare. As a result, the market may not be efficient. In this paper, system-wide redundant constraints on weighted generation levels are introduced to the day-ahead energy market to achieve equilibrium. With multipliers relaxing system demand constraints and redundant constraints serving as multipart prices, equilibrium can be achieved under the general condition that the optimal primal solution is among subproblem solutions for all units. Although incentive compatibility may not be achievable, the novel “local incentive compatibility” concept is introduced and quantified as the second best alternative to incentive compatibility.