Two-step price mechanism using Newton-Raphson method and peer-to-peer mediation for local electricity markets

Abstract

Locally trading Renewable Energy Sources (RES) leads to significant cost savings and promotes sector coupling. Local Electricity Markets (LEM) incentivize the deployment of more RES installations, thereby reducing dependency on fossil fuels and lowering carbon emissions. RES have the potential to decarbonize heating and incentivize e-mobility. In this paper, two innovative pricing mechanisms for LEM are proposed. Uniform price (UP) mechanism with price caps & floors and post-auction price adjustment (CUPA-PPA) imposes auction price caps to prevent excessively low or high prices, excluding bids below/above the Feed-in Tariff (FiT)/Time-of-Use (ToU) rates. For any remaining buying quantity, the post-auction prices are adjusted iteratively until equilibrium using the Newton-Raphson method, ensuring transactions occur within the FiT and ToU range. The second mechanism combines UP with a mediating Peer-to-Peer (CUPA-P2P) trading. These mechanisms aim to enhance trading opportunities, increase RES usage and better link electricity, heating and transportation, while ensuring price stability and fairness. They provide a more equitable distribution of savings (as evidenced by the lower Gini index) and greater savings compared to UP, with both metrics showing stronger performance in the summer (0.14/19 %) than in the winter (0.18/4.32 %). Moreover, the traded quantities increase almost three times in both winter and summer months.