Price computation in electricity auctions with complex rules: An analysis of investment signals

Authors

Carlos Vazqueza, Michelle Hallackc, Miguel Vazquez

Abstract

This paper discusses the problem of defining marginal costs when integer variables are present, in the context of
short-term power auctions. Most of the proposals for price computation existing in the literature are concerned
with short-term competitive equilibrium (generators should not be willing to change the dispatch assigned to
them by the auctioneer), which implies operational-cost recovery for all of the generators accepted in the
auction. However, this is in general not enough to choose between the different pricing schemes. We propose to
include an additional criterion in order to discriminate among different pricing schemes: prices have to be also
signals for generation expansion. Using this condition, we arrive to a single solution to the problem of defining
prices, where they are computed as the shadow prices of the balance equations in a linear version of the unit
commitment problem. Importantly, not every linearization of the unit commitment is valid; we develop the
conditions for this linear model to provide adequate investment signals. Compared to other proposals in the
literature, our results provide a strong motivation for the pricing scheme and a simple method for price
computation.

Energy Policy 103 (2017)