Production Cost Minimization versus Consumer Payment Minimization in Electricity Pools

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Algorithms that involve some kind of optimization have been adopted by several electricity pools as a tool to clear the market. Traditionally, this kind of model was used on a cost-minimizing basis, but recent papers have pointed out that alternative dispatches may be obtained that, even with higher production costs, result in lower electricity prices for consumers. This paper studies this new payment-minimization approach, including the long-term economic signals that it provides and their impact on future investments. Our results show that minimizing consumer payment results in discriminatory scheduling for certain generation resources and may cause, in the long run, higher prices for consumers.