Abstract
In Chao and Peck (1996), we introduced a new approach to the design of an efficient electricity market that incorporates externalities due to loop flows. This approach enables an innovative flow-based bidding scheme for pricing transmission services. In the short term, due to some technological constraints, a hybrid institutional structure that encompasses a decentralized contract market (via the system operator) is necessary for implementation. In this paper, we present an incentive scheme that fosters efficiency and reliability within such art institutional structure. An essential ingredient is that the system operator provides all electricity traders choices of priority insurance against interruptions. We show how this scheme will ensure the integrity of the electrical contract market and provide the system operator incentives to maintain system reliability in all efficient manner in real-time dispatch.
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