Congestion unpriced: Inefficiency and gaming in Ontario’s two-schedule electricity market design

This paper uses simple electricity market models to demonstrate the workings of, and problems with, Ontario’s zonal price/two-schedule electricity market design. The roles played by zonal prices, Shadow LMP prices, and out-of-market congestion payments are explained. This market design is compared and contrasted to the much better-known single-schedule designs with LMP pricing used in neighboring U.S. markets. The ways in which congestion payments can, and have been, gamed is highlighted and shown to be special cases of counter-trading "inc-dec games". The bizarre outcomes for interjurisdictional trading arising from Ontario’s use of congestion pricing on its interties combined with uniform pricing on the internal grid are demonstrated. Some gaming problems identified in other markets are reviewed compared to Ontario’s situation. Finally, the paper recaps the system operator’s efforts to remedy the various problems with the market while preparing a fundamental redesign.