Electricity Pooling Markets with Strategic Producers Possessing Asymmetric Information II: Inelastic Demand

TL;DR

This paper proposes a market mechanism for inelastic demand electricity pooling markets with strategic producers, ensuring efficiency, rationality, and budget balance despite private information and demand inelasticity.

Contribution

It introduces a novel mechanism that guarantees efficiency, individual rationality, and budget balance in inelastic demand electricity markets with asymmetric information.

Findings

Mechanism achieves price efficiency at equilibrium.

Energy production aligns with centralized optimization.

Market is individually rational and budget balanced.

Abstract

In the restructured electricity industry, electricity pooling markets are an oligopoly with strategic producers possessing private information (private production cost function). We focus on pooling markets where aggregate demand is represented by a non-strategic agent. Inelasticity of demand is a main difficulty in electricity markets which can potentially result in market failure and high prices. We consider demand to be inelastic. We propose a market mechanism that has the following features. (F1) It is individually rational. (F2) It is budget balanced. (F3) It is price efficient, that is, at equilibrium the price of electricity is equal to the marginal cost of production. (F4) The energy production profile corresponding to every non-zero Nash equilibrium of the game induced by the mechanism is a solution of the corresponding centralized problem where the objective is the maximization of the sum of the producers' and consumers' utilities. We identify some open problems associated with our approach to electricity pooling markets.