Equilibrium Prices in Transmission Constrained Electricity Markets: Non-Linear Pricing and Congestion Rents

Abstract

The use of transmission constrained unit commitment models to determine nodal energyprices in electricity markets is widely recognized as an efficient way implement electricity marketthat provide efficient pricing signals in the short term. However, complexities of unit commitmentmodels arising from non-convexities in generation cost functions and network models can cause theabsence of classical Walrasian equilibrium; this means that the unit commitment based dispatchmodel will not be able, under some situations, to find a single equilibrium price for which the energymarket is cleared. Based on recent research on non-linear pricing for single-node unit commitmentmodels, this paper proposes a transmission constrained non-linear pricing alternative basedcoordination functions added to the classic decomposition Lagrangian relaxation algorithm tosolve transmission constrained unit commitment models. The new coordination algorithms findsagent?s purchase and sell prices that coordinate the market in the obscene of classic equilibrium.

Since non-linear prices differ for each agent connected to a transmission node, the value ofcongestion rents is redefined so that the new pricing mechanism is taken in to account. The redefinitionof congestion rents is necessary so that the implementation of financial transmission rights, in theirvaried forms, is still possible in order to provide a price hedging mechanism in the nodal spotmarket.