Sequential pricing of electricity

Abstract

This paper investigates the design and analysis of price formation in wholesale electricity markets given variability, uncertainty, non-convexity, and intertemporal operating constraints. The paper’s primary goal is to develop a framework to assess the many resource participation models, reserve product definitions, and enhanced pricing methods that have arisen in U.S. systems, especially in the context of growing contributions from wind, solar, and storage. Departing from the static models typically used for electricity auctions based on thermal resources, the paper situates price formation within the sequential decision problem faced by system operators. This more complete description of the problem has several implications for price formation. Since prices are derived from operational models, algorithmic choices in the design of policies for the sequential decision problem influence the prices ultimately formed. In numerical tests, policy variants with comparable operational performance (within 4% in terms of total cost) lead to substantial differences in prices and resource remuneration. Storage is particularly affected, earning revenues ranging from 57% to 117% of the amount suggested as economically efficient by a benchmark approximated through stochastic programming.