CAREER: Pricing Non-convexities Toward Transparency in Electricity Markets

North Carolina State University, Raleigh NC

Investigators

Abstract

Despite the intention of providing the right signals to incentivize efficient market outcomes, pricing has been a major challenge in electricity market design, due to the discrepancy between the idealistic convexity assumptions in economics and the practical non-convexities of the operating characteristics of generating units. Corrective measures have been adopted, such as side-payments for cost recovery, but at the expense of compromising transparency. The issue of transparency has been a persistent concern from the stakeholders: the rationale behind a market mechanism is unclear, the settlement process is obscure, the evidence of effectiveness is insufficient, and so forth. While the wholesale electricity markets throughout the U.S. have been redesigned after the California electricity crisis, there remain a lot of ambiguities arising from the sophisticated market rules, resulting in many long-lasting litigations. Moreover, emerging market mechanisms including virtual transactions may bring in additional gaming opportunities, which can be further exacerbated by the lack of transparency. This project aims to better understand and resolve the pricing challenges arising from non-convexities, thus enabling more transparency in electricity market design. The integrated research and education activities, including the Energy Immersion Week which provides hands-on opportunities for students, will promote participation in STEM, improve STEM education and educator development, and increase public energy literacy and engagement in energy efficiency programs. The goal of this five-year project is to build analytical frameworks to understand, evaluate, and adapt the evolving market mechanisms, toward the long-term goal of creating market mechanisms and providing policy recommendations that enhance the transparency, reduce the manipulation, and ultimately improve the efficiency of electricity markets. Given that the underlying engineering details are typically highly abstracted in policymaking, this project will recognize and incorporate the intricate operational constraints in power systems into economic modeling, elevating the role of engineers in market design. Following a convergence approach of engineering, economics, operations research, and data science, this project will advance the state of knowledge in electricity market design regarding: (1) comprehensive comparison of different combinations of pricing and uplift schemes; (2) game-theoretic modeling and analysis of strategic bidding in the presence of uplift; (3) data-driven characterization of two-settlement, networked systems; (4) theoretical and empirical evaluation of the efficiency impact of virtual transactions; (5) analysis of uplift allocation rules for virtual transactions; and (6) design of financial instruments and operating paradigms for increased situational awareness. This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.