A Unified Approach to Pricing Under Nonconvexity

Abstract

Nonconvexity in electricity markets creates difficulties in the pricing of electricity today. Equilibrium prices often do not exist, and some forms of side payments are required to provide revenue adequacy for cleared offers and bids in markets. To improve market efficiency and transparency, academia and industry have proposed different pricing schemes, each of that emphasizes only a certain aspect of the desired price. In this paper, we summarize the existing pricing objectives and propose a unified model for pricing under nonconvexity. The tradeoff among competing objectives can be modeled. A specific example of the unified nonconvexity pricing model is presented, which can be regarded as a general representation of the convex hull pricing method and the commonly adopted locational marginal pricing scheme. The primal formulation of this model is derived. The economic insight of the convex hull pricing method is illustrated based on this model. An extreme-point-based solution method is presented. The proposed pricing model establishes a framework for analyzing the tradeoff among different objectives for pricing under nonconvexity and provides an opportunity to construct more economically justifiable prices through a modification of the objective function and constraints of the proposed pricing model.