On pricing issues in electricity markets in the presence of externalities

Abstract

Economic efficiency is an important goal of all markets including electricity market. Pricing mechanisms can significantly affect the economic efficiency of electricity market. Non-convexities and negative externalities which are resulted from the quasi-fixed cost and operational restrictions of generation units are inherent in electricity markets and affect the economic efficiency of the pricing mechanisms. Although the non-convexities have been studied in the literature, the negative externalities need to be addressed in more details. In this paper, the effects of externalities on the economic efficiency of electricity pricing are studied. Since the pricing in the day-ahead market is an important issue in the electricity market, this mechanism is studied and analyzed as an instance. Due to the inherent non-convexities in the electricity markets, the pricing mechanisms considering non-convexities are evaluated. Two general approaches of pricing in the presence of non-convexities are the uplift-based pricing and the marginal price modification. In this paper, both methods are extended to consider externalities and approach the real market structure, and then numerical studies are conducted on standard test systems. © 2022 Elsevier Ltd