Investment effects of pricing schemes for non-convex markets

Jacob Mays*, David P. Morton, Richard P. O'Neill

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

Non-convex markets, such as those organized by electricity system operators, lack uniform clearing prices. In an attempt to align private and social costs when clearing these markets, operators have introduced a variety of price formation and uplift payment schemes. We investigate the impact that the choice of pricing scheme can have on generator entry and exit decisions. Our results suggest that despite the presence of fixed production cost elements, prices derived from marginal costs support the optimal capacity mix. The use of uplift payments to supplement these prices could lead to significant distortion of the capacity mix arising in competitive markets. Pricing schemes designed to reduce the need for uplift payments may at the same time reduce prices, leading to lower levels of capacity in equilibrium. Schemes intended to raise prices, to the extent they eliminate the need for discriminatory side payments, may allow system operators to support a higher level of capacity with less distortion to the capacity mix.

Original languageEnglish (US)
Pages (from-to)712-726
Number of pages15
JournalEuropean Journal of Operational Research
Volume289
Issue number2
DOIs
StatePublished - Mar 1 2021

Keywords

  • Capacity expansion
  • Equilibrium pricing
  • Market design
  • OR in energy
  • Uplift

ASJC Scopus subject areas

  • Computer Science(all)
  • Modeling and Simulation
  • Management Science and Operations Research
  • Information Systems and Management

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