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Market Design Considerations for Scarcity Pricing: A Stochastic Equilibrium Framework

Scarcity pricing is a mechanism for improving the valuation of reserve capacity in real-time electricity markets. The goal of scarcity pricing is to mitigate the missing money problem and enhance investment in flexible resources. The implementation of scarcity pricing is underway in a number of U.S. markets, including Texas and PJM. The implementation is also currently under consideration in Belgium. As the mechanism was originally conceived in the context of a U.S.-style two-settlement system, its implementation in a European setting poses a number of interesting market design dilemmas which can affect the back-propagation of scarcity prices to forward day-ahead markets for energy and reserve capacity. We propose a modeling framework for analyzing these market design choices based on stochastic equilibrium, and use this modeling framework in order to represent and analyze a wide range of market design proposals. We report results on a case study of the Belgian electricity market.

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Keywords: Scarcity pricing, Operating reserve demand curve, Stochastic equilibrium

DOI: 10.5547/01956574.42.5.apap

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Published in Volume 42, Number 5 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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