A Comparative Study of Pricing Mechanisms to Reduce Side-Payments in the Electricity Market: A Case Study for South Korea

Hansol Shin, Tae Hyun Kim, Kyuhyeong Kwag and Wook Kim
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Hansol Shin: Department of Electrical and Electronics Engineering, Pusan National University, Busan 46241, Korea
Tae Hyun Kim: Department of Electrical and Electronics Engineering, Pusan National University, Busan 46241, Korea
Kyuhyeong Kwag: Department of Electrical and Electronics Engineering, Pusan National University, Busan 46241, Korea
Wook Kim: Department of Electrical Engineering, Pusan National University, Busan 46241, Korea

Energies, 2021, vol. 14, issue 12, 1-19

Abstract: Under marginal-cost pricing, some generators cannot recover their production costs at the market price due to non-convexities in the electricity market. For this reason, most electricity markets pay side-payments to generators whose costs are not sufficiently recovered, but side-payments present the problem of deteriorating transparency in the market. Recently, convex hull pricing and extended locational marginal pricing have been reviewed or gradually introduced to reduce side-payments. Another method is to include non-convex costs in the market price, which is applied in the Korean electricity market. Although it is not generally considered in the electricity market, the Vickrey auction method is also one of the pricing mechanisms that can reduce side-payments. The main purpose of this study is to analyze the financial impact of these alternative pricing mechanisms on market participants through rigorous simulation. We applied the alternative pricing schemes to the Korean electricity market, and the impacts are analyzed by comparing the cost aspect of an electricity sales company and the profit aspect of generation companies. As a result of the simulation study, each pricing mechanism not only differed in the degree to which side-payments are reduced but also has different effects on the type of generators.

Keywords: marginal-cost pricing; system marginal price (SMP); convex hull pricing; extended locational marginal price (ELMP); Vickrey auction; side-payment (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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