Incentives for Efficient Price Formation in Markets with Non-Convexities
Date Published: May 2019
Authors: Hung-Po Chao
Convex-hull pricing is often discussed as the best solution to the non-convexities that exist in wholesale electricity markets. This report examines potential pricing mechanisms, in particular: Lagrangian dualization, convex-hull relaxation and integer relaxation. The report demonstrates that the quasi- equilibrium pricing mechanism successfully produces convex pricing principles in a non-convex system. The report specifically highlights the integer relaxation method (which was approved for PJM fast-start unit pricing) and its ability to realize outcomes close to or exactly matching convex-hull pricing.