Electricity Market Design and Efficient Pricing: Applications for New England and Beyond.” In, 2014.Abstract“
Electricity markets support open access and non-discrimination to allow competition, entry, and innovation. Investment and operation in the competitive sectors follow the incentives induced by prices. To achieve the intended outcomes of reliability and economic efficiency, it is important to have efficient prices that are consistent with the objectives and operation of the underlying system. The basic design of successful organized electricity markets, built on the principles of bid-based, security-constrained economic dispatch, goes a long way towards meeting this objective. However, the real electricity system involves features that are difficult or impossible to fully reconcile within this core model. This calls for an application of the principles of dispatched-based pricing to move as far as possible to achieving the ideal of efficient pricing and minimizing the need for additional payments through uplift and other interventions to maintain reliability. The challenge is constantly present to match the prices to reflect the actual changing conditions of the dispatch. Motivated by issues under review in New England, a summary of the basic principles and illustrative applications provides examples of seeking the first-best efficient prices to mitigate the unintended consequences of second-best out-of-market payments.