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On the inefficiency of the merit order in forward electricity markets with uncertain supply

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  • Morales, Juan M.
  • Pineda, Salvador

Abstract

This paper provides insight on the economic inefficiency of the classical merit-order dispatch in electricity markets with uncertain supply. For this, we consider a power system whose operation is driven by a two-stage electricity market, with a forward and a real-time market. We analyze two different clearing mechanisms: a conventional one, whereby the forward and the balancing markets are independently cleared following a merit order, and a stochastic one, whereby both market stages are co-optimized with a view to minimizing the expected aggregate system operating cost. We first derive analytical formulae to determine the dispatch rule prompted by the co-optimized two-stage market for a stylized power system with flexible, inflexible and stochastic power generation and infinite transmission capacity. This exercise sheds light on the conditions for the stochastic market-clearing mechanism to break the merit order. We then introduce and characterize two enhanced variants of the conventional two-stage market that result in either price-consistent or cost-efficient merit-order dispatch solutions, respectively. The first of these variants corresponds to a conventional two-stage market that allows for virtual bidding, while the second requires that the stochastic power production be centrally dispatched. Finally, we discuss the practical implications of our analytical results and illustrate our conclusions through examples.

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  • Morales, Juan M. & Pineda, Salvador, 2017. "On the inefficiency of the merit order in forward electricity markets with uncertain supply," European Journal of Operational Research, Elsevier, vol. 261(2), pages 789-799.
    • Handle: RePEc:eee:ejores:v:261:y:2017:i:2:p:789-799
    DOI: 10.1016/j.ejor.2017.02.033
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    References listed on IDEAS

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    2. Lina Silva-Rodriguez & Anibal Sanjab & Elena Fumagalli & Ana Virag & Madeleine Gibescu, 2020. "Short Term Electricity Market Designs: Identified Challenges and Promising Solutions," Papers 2011.04587, arXiv.org.
    3. Currier, Kevin M. & Rassouli-Currier, Susanne, 2018. "Producer incentives in electricity markets with green quotas and tradable certificates," Utilities Policy, Elsevier, vol. 55(C), pages 59-68.
    4. Keller, Jann T. & Kuper, Gerard H. & Mulder, Machiel, 2019. "Mergers of Germany's natural gas market areas: Is transmission capacity booked efficiently?," Utilities Policy, Elsevier, vol. 56(C), pages 104-119.
    5. Abate, Arega Getaneh & Riccardi, Rossana & Ruiz, Carlos, 2022. "Contract design in electricity markets with high penetration of renewables: A two-stage approach," Omega, Elsevier, vol. 111(C).
    6. Rossana Riccardi & Giorgia Oggioni & Elisabetta Allevi & Abdel Lisser, 2023. "Complementarity formulation of games with random payoffs," Computational Management Science, Springer, vol. 20(1), pages 1-32, December.
    7. Arega Getaneh Abate & Rossana Riccardi & Carlos Ruiz, 2022. "Contract design in electricity markets with high penetration of renewables: A two-stage approach," Papers 2201.09927, arXiv.org, revised Jun 2022.
    8. Anna Schwele & Christos Ordoudis & Pierre Pinson & Jalal Kazempour, 2021. "Coordination of power and natural gas markets via financial instruments," Computational Management Science, Springer, vol. 18(4), pages 505-538, October.
    9. Bjørndal, Endre & Bjørndal, Mette & Midthun, Kjetil & Tomasgard, Asgeir, 2018. "Stochastic electricity dispatch: A challenge for market design," Energy, Elsevier, vol. 150(C), pages 992-1005.
    10. Morales, J.M. & Muñoz, M.A. & Pineda, S., 2023. "Prescribing net demand for two-stage electricity generation scheduling," Operations Research Perspectives, Elsevier, vol. 10(C).

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