Market-Based Redispatch May Result in Inefficient Dispatch

In this paper we analyze a uniform price electricity spot market that is followed by redispatch in the case of network congestion. We assume that the transmission system operator is incentivized to minimize redispatch cost and compare a cost-based redispatch to a market-based redispatch mechanism. For networks with at least three nodes we show that in contrast to cost-based redispatch, in the case of market-based redispatch the cost-minimizing allocation may not be short-run efficient. As we demonstrate, the possibility of the transmission system operator to reduce market-based redispatch cost at the expense of a reduced welfare may be driven by the electricity supply side or the electricity demand side. Based on these results, we propose a new hybrid approach where the transmission system operator implements the efficient (instead of the cost minimizing) dispatch and uses market-based redispatch compensations.