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Electricity market reform to enhance the energy market pricing mechanism: observations from PJM

Presented by: 
Hung-po Chao
Monday 7th January 2019 - 16:00 to 17:00
INI Seminar Room 1
Session Title: 
Industrial Needs Expression
Electricity market reform to enhance the energy and reserve pricing mechanism: Observations from PJM

by Hung-po Chao


For more than 20 years, the PJM wholesale markets have successfully worked to promote competition, produce stable energy prices and attract competitive resource investments to ensure efficient and reliable operations. However, in recent years, the PJM markets have been undergoing a significant transition. While such transitions have also occurred elsewhere, each has resulted in some unique challenges.
This paper examines issues regarding efficient price formation in the energy and reserve markets under non-convex. In principle, with non-convexity, no market clearing prices exist without side payments. In a pool-based wholesale electricity market, one of the greatest challenges unmatched in scale and complexity is that in the day-ahead and real-time markets, after running a mixed integer programming model for solving a security constrained economic commitment and dispatch problem to determine the market allocations, a pricing model is employed to determine the market clearing prices and side payments in ways that must promote economic efficiency, consistent incentives and revenue sufficiency.

One of the most severe limitations of the current pricing mechanism (locational marginal pricing or LMP) is that LMP is not incentive compatible. This limitation has caused adverse effects in operations and investments. Building on the classic Lagrangian dual formulation, this paper extends the existing pricing method in a way that is dominant strategy incentive compatible in a competitive market with a large number of independent suppliers, and like a Vickery-Clark-Grove mechanism, truthful revelation would become a dominant strategy. The convex hull pricing method or called the extended LMP, is a well-known case which yields the minimum uplift. Moreover, integer relaxation is a computationally practical implementation that ensures incentive compatibility producing generally good, and often exact, approximations to ELMP solutions if the cost functions are homogeneous of degree one.

As market continues to evolve with flattening demand growth, flattening supply curves with low marginal costs and penetration of renewable resources with zero marginal cost, non-convex conditions will become growingly important. A key advantage of enhanced pricing mechanism is that it would form price signals in ways that would foster economic efficiency in operations and investments, demand participation and market innovation.
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Presentation Material: 
University of Cambridge Research Councils UK
    Clay Mathematics Institute London Mathematical Society NM Rothschild and Sons