A Bilevel Programming Approach to Price Decoupling in Pay-as-Clear Markets, with Application to Day-Ahead Electricity Markets

Antonio, Frangioni and Fabrizio, Lacalandra (2022) A Bilevel Programming Approach to Price Decoupling in Pay-as-Clear Markets, with Application to Day-Ahead Electricity Markets. Technical Report del Dipartimento di Informatica . University of Pisa, Pisa, IT. (Submitted)

PDF - Submitted Version Available under License Creative Commons Attribution Non-commercial No Derivatives. Download (1MB)

Abstract

The Italian and European electricity markets are experiencing a crisis caused by sharp increases in gas prices, which are reflected in dramatically higher final cost of electricity for all consumers w.r.t. historical values. This, however, is only in part motivated by the higher price of the gas actually used for electricity production: a very significant contribution is instead due to the "Pay-as-Clear" (PaC) mechanism implemented in the Day-Ahead Electricity Market (DAM), whereby all producers are remunerated at the price of the most expensive--typically, gas-fired--unit. This has led to a surge of the interest in the development of mechanisms capable of decoupling the price paid to the units whose production cost depends on that of fuel--and that therefore must be able to track that to ensure the economic compatibility of their operations--from those for which this is not the case. However, since both types of units participate in satisfying the same demand, this is technically complex. Motivated by this highly compelling application we propose the concept of Segmented Pay-as-Clear (SPaC) market, introducing a new family of market clearing problems--in fact, a relatively straightforward modification of standard ones--that has the potential to achieve such a decoupling without losing the crucial features of the PaC, i.e., that of providing both long- and short-term price signals. The approach is based on dynamically partitioning demand across the segmented markets, where the partitioning is endogenous, i.e., controlled by the model variables, and is chosen to minimise the total system cost. The thusly modified model belongs to the family of Bilevel Programming problems with a non-linear non convex objective function, or more generally a Mathematical Program with Complementarity Constraints; these problems have a higher computational complexity than those corresponding to the standard PaC, but in the same ballpark as the models routinely used in real-world DAMs to represent "nonstandard" requirements, e.g., the unique buying price in the Italian DAM. Thus, SPaC models should still be solvable in a time compatible with market operation with appropriate algorithmic tools. Like all market models, SPaC is not immune to strategic bidding techniques, but some theoretical results indicate that, under the right conditions, the effect of these could be limited. An initial experimental analysis of the proposed models, carried out through Agent Based simulations, seems to indicate a good potential for significant system cost reductions and an effective decoupling of the two markets.

Item Type:	Book
Additional Information:	This technical report is of an eminently scientific nature. The ideas expressed herein do not necessarily represent those of ARERA, for which the second author works.
Uncontrolled Keywords:	Day-Ahead Market, Price-as-Clear, Decoupling, Bilevel Programs, Mathematical Program with Complementarity Constraints, Agent Based
Subjects:	Area09 - Ingegneria industriale e dell'informazione > ING-IND/09 - Sistemi per l'energia e l'ambiente Area09 - Ingegneria industriale e dell'informazione > ING-IND/33 - Sistemi elettrici per l'energia Area01 - Scienze matematiche e informatiche > MAT/09 - Ricerca operativa Area13 - Scienze economiche e statistiche > SECS-S/06 - Metodi matematici dell'economia e delle scienze attuariali e finanziarie
Divisions:	Dipartimenti (from 2013) > DIPARTIMENTO DI INFORMATICA
Depositing User:	Prof. Antonio Frangioni
Date Deposited:	27 Sep 2022 15:23
Last Modified:	27 Sep 2022 15:23
URI:	http://eprints.adm.unipi.it/id/eprint/2407

Repository staff only actions

View Item