Dual Pricing Algorithm in ISO Markets

• Published in: IEEE transactions on power systems Vol. 32; no. 4; pp. 3308 - 3310
• Main Authors: O'Neill, Richard P., Castillo, Anya, Eldridge, Brent, Hytowitz, Robin Broder
• Format: Journal Article
• Language: English
• Published: New York IEEE 01.07.2017; The Institute of Electrical and Electronics Engineers, Inc. (IEEE)
• Subjects: Algorithm design and analysis; Causation; Centralized day-ahead electricity market; Clearing; Cost allocation; Economic impact; Economic models; Economics; Efficient markets; Electricity pricing; Electricity supply industry; Generators; ISO; Marketing; Markets; MATHEMATICS AND COMPUTING; mixed-integer linear programming; non-convex pricing; power system economics; Pricing; Pricing policies; Resource management; Unit commitment
• ISSN: 0885-8950; 1558-0679; 1558-0679
• DOI: 10.1109/TPWRS.2016.2614891

The challenge to create efficient market clearing prices in centralized day-ahead electricity markets arises from inherent nonconvexities in unit commitment problems. When this aspect is ignored, marginal prices may result in economic losses to market participants who are part of the welfare maximizing solution. In this essay, we present an axiomatic approach to efficient prices and cost allocation for a revenue neutral and nonconfiscatory day-ahead market. Current cost allocation practices do not adequately attribute costs based on transparent cost causation criteria. Instead we propose an ex post multipart pricing scheme, which we refer to as the dual pricing algorithm. Our approach can be incorporated into current day-ahead markets without altering the market equilibrium.