Pricing Rules for Electricity Auctions with Non-Convexities

In this Energy Policy Seminar, Nicolas Stevens, a researcher at the Center for Operations Research and Econometrics and a visiting researcher at the Belfer Center, drew on a recent paper in Energy Economics to discuss different pricing approaches for dealing with non-convexities in electricity auctions.

Recording

Abstract

Nicolas Stevens, Anthony Papavasiliou, Yves Smeers, "On some advantages of convex hull pricing for the European electricity auction," Energy Economics, Volume 134, 2024, 107542, https://doi.org/10.1016/j.eneco.2024.107542.

Since the liberalization of the power sector and the creation of wholesale electricity markets, the question of how to price the non-convexities that are present in the market has attracted the interest of both academics and practitioners. Over the years, US markets have adopted different and evolving pricing rules which are still vividly debated. Since the “Trilateral Market Coupling” (2006), the European day-ahead market has opted for a notably different pricing rule, and there is currently research undertaken by the EU stakeholders to reform it. Our work aims at contributing to the debate. We analyze six different pricing methods. We establish several mathematical properties for enabling their comparison. Our findings are illustrated on stylized examples and numerical simulations that are performed on realistic auction datasets. Both theoretical and numerical evidences that are gathered in our paper point towards the advantages of the so-called “convex hull pricing” approach.