Alternative auction objectives and pricing schemes in short-term electricity markets

Abstract

Auction objective and pricing scheme are of great importance to a successful electricity market design. The bid-cost minimization auction objective and the economic-dispatch pricing scheme currently used in U.S. electricity markets have stimulated many questions from both academia and industry. This paper summarizes several alternative auction objectives and pricing schemes proposed in recent research. Different market designs by combining an auction objective and a pricing scheme are then discussed with illustrative examples. Our conclusion is that the current design is by no means perfect and needs significant improvement in many aspects, but probably is still the most viable solution to this day. Also, further study of electricity market design through a combined force of economists and engineers is believed to be much needed, and several potentially important research topics are identified.