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Do Centrally Committed Electricity Markets Provide Useful Price Signals?

Centrally committed markets rely on an independent system operator to determine the commitment and dispatch of generators. This is done by solving a unit commitment model, which is an NP-hard mixed integer program that is rarely (if ever) solved to complete optimality. We demonstrate, using a case study based on the ISO New England system, that near-optimal solutions that are very close to one another in terms of overall system cost can yield very different generator surpluses and prices. We further demonstrate that peaking generators are more prone to surplus differences between near-optimal solutions and that transmission buses that are most prone to binding transmission constraints experience the greatest price fluctuations. Based on these findings, we discuss the potential benefits of a decentralized market design in providing more robust price signals. Keywords: Unit commitment, Market design, Pricing http://dx.doi.org/10.5547/01956574.33.4.5

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Energy Specializations: Energy Modeling – Energy Data, Modeling, and Policy Analysis; Electricity – Markets and Prices ; Electricity – Policy and Regulation

JEL Codes:
E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
D42 - Market Structure, Pricing, and Design: Monopoly
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

DOI: 10.5547/01956574.33.4.5

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Published in Volume 33, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.