A bilevel programming approach to price decoupling in Pay-as-Clear markets, with application to day-ahead electricity markets

Antonio Frangioni and Fabrizio Lacalandra

European Journal of Operational Research, 2024, vol. 319, issue 1, 316-331

Abstract: Motivated by the recent crisis of the European electricity markets, we propose the concept of Segmented Pay-as-Clear (SPaC) market, introducing a new family of market clearing problems that achieve a degree of decoupling between groups of participants. This requires a relatively straightforward modification of the standard PaC model and retains its crucial features by providing both long- and short-term sound 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 leads to solving Bilevel Programming problems, or more generally Mathematical Programs with Complementarity Constraints; these 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 Day Ahead Markets (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.

Keywords: (R) OR in energy; Day-ahead market; Bilevel programs; Mathematical programs with complementarity constraints; Agent based simulation (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:319:y:2024:i:1:p:316-331

DOI: 10.1016/j.ejor.2024.06.018

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