Chapter 6 - The Cost of Anarchy in Self-Commitment-Based Electricity Markets

Abstract

This chapter examines the issue of dispatch efficiency raised by the design of markets based on central versus self-commitment by determining a set of “competitive benchmarks” for the two market designs. It provides the context on the debate regarding the scope of centralized markets and further describes centrally and self-committed markets and the market models used in the simulations. Comparing the total commitment and dispatch costs of the two markets provides a bound on the productive efficiency losses of a self-committed market. With the advent of restructured electricity markets a contentious market design issue has been whether unit commitment decisions should be made centrally by the system operator or by individual generators. Although a centrally committed market can determine the most efficient commitment, they have been shown to suffer some equity and incentive problems. A self-committed market can overcome some of these incentive issues but will generally suffer efficiency losses from not properly coordinating commitment and dispatch decisions between individual generators. The competitive benchmarks assume that generators do not behave strategically in manipulating their offers in the two markets. Comparing the total commitment and dispatch cost of the two market designs shows the extent of productive efficiency losses from decentralized markets, which are small but non-trivial. Comparing total settlement costs of the two designs shows that generators can extract significantly higher payoffs from consumers under a decentralized design, suggesting that this design may be the wrong approach if the goal of restructuring is to reduce consumer costs. These higher prices under a decentralized design would further result in allocative efficiency losses in markets with demand response.