July 03, 2024
11:00
Doyen 22
Richard O’Neill
(Federal Energy Regulatory Commission)
invited by Nicolas Stevens
will give a presentation on :
Average Incremental Cost (AIC) Pricing for a Surplus-Maximizing Two-Sided Multi-Period Non-Convex ISO Auction Market
Abstract :
General equilibrium theory is an elegant presentation of the properties of convex and certain non-convex markets. Convex auction markets have a ‘single-price’ Walrasian market clearing. If the bids and offers are at marginal costs and values (truth telling), the markets are Pareto efficient. Prices are revenue neutral and sustainable. In the absence of market power, the market is incentive compatible. In a sense they achieve perfection by assuming away problems. With the exception of certain financial markets, the reality is that markets are not convex. For non-convex markets, these properties can be approximated using the convex hull and limit arguments such as ‘as the number of market participants approaches infinity’. If the convex hull is not close to the feasible constraint set, the presentation may not be very elegant and a single-price Walrasian equilibrium may not exist. Specifically, markets with units that have declining average costs, e.g. fossil-fuel generators, or increasing average value, e.g., batch product runs with startup costs, may need discriminatory pricing to efficiently clear the markets and retain some of the important properties of market design. In this presentation, we focus the analysis on ISO electric energy auction markets with energy (private goods) and reserves (public goods), and introduce average incremental cost pricing. We show that AIC pricing has properties that are superior to the properties of other pricing methods including LMP+ (LMP +make-whole payments) , ELMP+ (ELMP +make-whole payments) and Convex Hull Pricing (CHP+uplift). AIC pricing is similar to LMP+, ELMP+ and CHP, but eliminates two troubling issues: make-whole payments and uplift, and letting a non-dispatched unit set the market price. Other properties include transparency, that is, free of uplift or make-whole payments, entry and exit signaling, revenue neutrality, incentive compatibility. Prices may need to be discriminatory or split each node and time period into two separate but related markets: an upper market and a lower market. Each is priced separately but can interact symbiotically. In bilateral markets with an empty core, negotiations are in an indefinite loop. The auction also solves this problem: first by finding the optimal surplus and then pricing the optimal solution. In addition, AIC pricing lowers capacity market prices. With bid-in demand and AIC pricing, the market is more efficient, more reliable, more sustainable, and may eliminate the need for a capacity market.
In case you are planning to attend the seminar, please feel free to register here in order for us to estimate attendance: