Antimonopoly regulation method in energy markets based on the Vickrey–Clarke–Groves mechanism

Abstract

A profit-maximizing producer with market power operating a portfolio of generating units at the centralized two-settlement energy market may submit not only the altered cost but also the distorted values of the technical parameters of its generating units, which enter both the producer's private constraints and the system-wide constraints of the centralized dispatch optimization problem. Prior research on the suitability of the generic Vickrey–Clarke–Groves (VCG) mechanism as an antimonopoly measure against such a producer focused on the distortion of the offered output cost only. We evaluate the applicability of the VCG mechanism against a producer that also misreports the technical parameters of its units. To ensure the applicability of the VCG method in this setting, we identify an additional assumption on the variations of the feasible set induced by alterations of the producer's technical parameters. In the framework of the VCG mechanism, we propose an antimonopoly regulation method based on a regulator estimate of the producer's truthful bid. The error in the estimate affects neither the producer's dominant bid nor its optimal nodal output but manifests itself in the total uplift payment (budget imbalance). This ensures optimality of dispatch and shields the (pre-uplift) market prices from the producer's market power.