Antimonopoly regulation method in energy markets based on the Vickrey-Clarke-Groves mechanism

TL;DR

This paper explores the application of the Vickrey-Clarke-Groves mechanism as an antimonopoly tool in energy markets, proposing a regulation method that aligns producer incentives with truthful bidding and market efficiency.

Contribution

It introduces a novel antimonopoly regulation approach based on the VCG mechanism, accounting for technical parameter distortions and providing robustness against bid inaccuracies.

Findings

The proposed method ensures efficient market allocation and shields prices from market power.

It maintains producer profit maximization when the regulator's estimate is accurate.

The approach reduces uplift payments even with bid estimation errors.

Abstract

We evaluate the applicability of the generic Vickrey-Clarke-Groves (VCG) mechanism as an antimonopoly measure against a profit-maximizing producer with market power operating a portfolio of generating units at the centralized two-settlement energy market. The producer may indicate in its bid not only the altered cost function but also the distorted values of the technical parameters of its generating units, which enter the system-wide constraints of the centralized dispatch optimization problem. To ensure the applicability of the VCG method in this setting, we identify an additional assumption on the changes of the feasible set of the centralized dispatch optimization problem induced by variations of the producer's technical parameters. In the framework of the generic VCG mechanism, we propose an antimonopoly regulation method based on a regulator estimate of the producer's truthful bid. If this estimate is exact, the producer's maximum profit coincides with that in the case of the truthful bidding when no antimonopoly measure is applied. If the estimate is not exact, the error affects neither the producer's (weakly) dominant bid nor its optimal nodal output but manifests itself in the total uplift payment. This ensures an efficient allocation in the form of the optimal output/consumption schedule and shields the (pre-uplift) market prices from the producer's market power. We compare the suggested method with the alternative antimonopoly regulation approach based on the replacement of the producer's bid by a bid composed by the regulator.