A Stochastic Market Design With Revenue Adequacy and Cost Recovery by Scenario: Benefits and Costs

Abstract

Two desirable properties of electricity market mechanisms include: 1) revenue adequacy for the market, and 2) cost recovery for all generators. Previously proposed stochastic market-clearing mechanisms satisfy both properties in expectation only, or satisfy one property by scenario and another in expectation. Consequently, market parties may perceive significant risks to participating in the market since they may lose money in one or more scenarios, and therefore be discouraged from offering in the market or perhaps even from investing. We develop a stochastic two-stage market-clearing model including day-ahead and real-time settlements with an energy-only pricing scheme that ensures both properties by scenario. However, this approach is cost-inefficient in general and may sacrifice other desirable market attributes. Undesirable consequences include: One group of participants will have to pay more to ensure that all other participants have their costs covered, and thus their prices will not be equilibrium supporting; and day-ahead and real-time prices are not arbitraged in expectation, although this can be fixed by allowing virtual bidders to arbitrage but at the potential cost of increased market inefficiency. Considering these pros and cons, we propose our model as an appropriate tool for market analysis, and not for clearing actual markets. Numerical results from case studies illustrate the benefits and costs of the proposed stochastic market design.