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An Incentive Mechanism for Generation Capacity Investment in a Price-Capped Wholesale Power Market

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In electricity markets, market rules such as price caps defer proper investment in generation. The resulting generation mix is therefore sub-optimal if compared to the one that maximizes social welfare. In this paper, an incentive mechanism for a price-capped multi-area energy only market is proposed. The market model is posed as a mixed complementarity problem using the optimality conditions of all the individual players that participate in the multi-area electricity market. The resulting equilibrium problem is solved using a decomposition approach based on the Alternating Direction Method of Multipliers. The proposed solution algorithm takes advantage of the multi-area structure of the problem and outperforms state-of-the-art practices for solving these types of problems.


Egill Tómasson    
KTH Royal Institute of Technology

Mohammad Reza Hesamzadeh    
KTH Royal Institute of Technology

Darryl R. Biggar    
Australian Competition and Consumer Commission

Lennart Söder    
KTH Royal Institute of Technology


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