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Published January 2017 | public
Journal Article

An Efficient and Incentive Compatible Mechanism for Wholesale Electricity Markets

Abstract

Being widely used in many deregulated wholesale electricity markets, the locational marginal pricing (LMP) mechanism is known to achieve social optimality in a competitive market. When profit-maximizing generators act strategically to manipulate prices; however, LMP may lead to high loss of economic efficiency. In this paper, we apply the Vickrey-Clarke–Groves (VCG) mechanism to wholesale electricity markets. We show that the VCG mechanism minimizes the total cost at a truth-telling dominant strategy equilibrium. We establish an important comparative result that the VCG mechanism always results in higher per-unit electricity prices than the LMP mechanism under any given set of reported supply curves. Numerical results show that the difference between the per-unit prices resulting from the two mechanisms is negligibly small (about 4%) in the IEEE 14-bus and 30-bus test systems. Finally, we apply the VCG mechanism to a day-ahead setting with start-up cost (of conventional generators) and intermittent renewable generation. We show that the VCG mechanism induces the truth-telling behavior of conventional generators in dominant strategies and yields each conventional generator a non-negative expected profit.

Additional Information

© 2015 IEEE. Manuscript received January 13, 2015; revised April 24, 2015 and July 14, 2015; accepted September 23, 2015. Date of publication October 13, 2015; date of current version December 21, 2016. This work was supported in part by the Massachusetts Institute of Technology-Singapore University of Technology and Design International Design Center under Grant IDG21400103, in part by the National Science Foundation (NSF) NetSE under Grant CNS-0911041, in part by the NSF as part of the NSF/Department of Homeland Security/Department of Transportation/National Aeronautics and Space Administration/National Institutes of Health Cyber-Physical Systems Program under Grant 1545096, in part by the Advanced Research Projects Agency-Energy under Grant DE-AR0000226, in part by the Southern California Edison, in part by the Skotech grant, and in part by the Resnick Institute. Paper no. TSG-00046-2015.

Additional details

Created:
August 19, 2023
Modified:
October 24, 2023