Payment Mechanisms, Efficiency Savings and Risk Aversion in Electricity Markets
Location
ISMP, Bordeaux, France
Abstract
We examine an electricity market clearing mechanism which comprises dispatching intermittent, flexible and inflexible generation agents according to the optimal solution of a stochastic program. The first stage corresponds to a pre-commitment decision, and the second stage corresponds to real-time generation that adapts to different realisations of a random variable. By taking the Lagrangian and decoupling in different ways we obtain two payment mechanisms with different properties. We also consider generation agents who are risk-averse and model their risk-aversion using law-invariant coherent risk measures. We uncover a closed-form characterization of the optimal pre-commitment policy for a given real-time dispatch policy, with arbitrary risk-aversion. When participants cannot trade risk, a risked equilibrium exists which provides less pre-commitment than when participants are risk-neutral. Alternatively, when participants trade a rich set of financial instruments, a second risked equilibrium exists which provides more pre-commitment than when generators are risk-neutral. We illustrate our findings by implementing the SP mechanism in the New Zealand Electricity Market.